Arya said investor demand was diverted to National Housing Banks (NHB) second tranche of tax-free bonds, which offers a higher coupon rate. NHBs public issue of tax-free bonds worth Rs 1,000 crore offers a maximum coupon rate of 8.93% for a tenure of 15 years, while IRFCs bond issue offers a maximum coupon rate 8.88% for a 15-year tenure. At the end of Fridays close, NHBs public issue had received bids worth R1,251 crore while IRFCs issue got bids worth Rs 774.65 crore.
Rural Electrification Corporation (REC), National Thermal Power Corporation (NTPC) and NHB were, earlier in the month, allowed to increase the shelf limits on their tax-free bond issues. While REC and NHB came out with a second public issue of tax-free bonds worth Rs 1,000 crore each, NTPC raised Rs 500 crore via private placement.
In 2013-14, tax-free bonds saw a much better performance than the tepid demand seen last year as interest rates being offered are higher. This is partly because government bonds have risen sharply during the course of the year. The 10-year benchmark yield closed at 8.813% as on Friday.
Investors are also looking at tax-free bonds as an attractive long-term investment as there were media reports that suggested that they would be discontinued by the government. Finance minister P. Chidambaram did not allot tax-free bonds for state-owned companies in his interim budget speech earlier this month.