Cos buy tax-free bonds as retail participation dips

Written by Aftab Ahmed | Mumbai | Updated: Jan 25 2013, 05:43am hrs
With retail interest lukewarm, corporates are bailing out tax-free bond issues. L&T Finance has invested R300 crore and QIBs have invested R420 crore in the Indian Railway Finance Corporation (IRFC) issue, targeting to raise R8,886.40 crore. IRFC has raised R1,032 crore in the first three days of its opening. The IRFC issue has seen very little retail participation and corporates are buying into IRFCs issue.

Housing and Urban Development Corps (Hudco) has raised about R1,351 crore in tax-free bonds so far having extended the sale to February 1. Hudcos first tranche was pegged at R750 crore with an option to retain up to R5,000 crore. Hudco is offering 12-13 bps higher coupon than others as it is a lower-rated paper and is getting more retail subscription than the rest. Higher coupon has also attracted more high net worth individuals, merchant bankers said.

In all, five government-backed infrastructure companies have so far been able to raise just R8,042 crore or about a-fourth of the amount they are targetting through tax-free bonds with investors not enticed by the coupon rates being offered. The five companies are hoping to raise R32,176.4 crore.

India Infrastructure Finance Company (IIFCL) raised R2,850 crore, the highest amount picked up among three issues that have already closed, as it was able to bring private and public banks to buy the bonds. However, IIFCL too fell short of its target to raise R9,200 crore through the issue.

Rural Electrification Corp (REC), whose bond issuance was open in December, raised about R2,100 crore, less than half its target of R4,500 crore. Meanwhile, Power Finance Corps (PFC) bonds fared worst as even after extending the sale of bonds by a week it was undersubscribed and was able to raise just about R709 crore.

Merchant bankers said these bonds were a major success in the last financial year, but the success could not be repeated this time as the coupon was lower and the 50 bps higher rate of interest given to retail buyers was not available in case bonds are traded in the secondary market. Buyers of new bonds will have no other option but to hold them for 10-15 or 20 years if they want high interest rates. There was no such restriction last year.