Tax-free bonds (TFBs) are returning to the market after a gap of one year. A clutch of such bonds, aimed to collectively garner
Rs 40,000 crore, will hit the market in FY16, starting October, official sources told FE. These bonds will have tenures of 10, 15 and 20 years, they added.
Among the bond issues in the pipeline, the National Highways Authority of India will make the largest offering (Rs 24,000 crore). The Indian Railway Finance Corporation (Rs 6,000 crore), the Housing and Urban Development Corporation (Rs 5,000 crore) and the Indian Renewable Energy Development Agency (Rs 2,000 crore), NTPC (Rs 1,000 crore), Rural Electrification Corporation (Rs 1,000 crore) and Power Finance Corporation (Rs 1,000 crore) are the other firms to raise funds through this route in the current year.
The government had allowed several state-run companies to raise Rs 30,000 crore through tax-free bonds in FY12, Rs 25,000 crore in FY13 and Rs 50,000 crore in FY14 to raise long-term funds for infrastructure projects. There was no such bond issuance in FY15 as there was no pressing need, partly due to the slowdown in project implementations.
With the interest rate on a declining trajectory, the coupon rate on TFBs may not be as high as in FY14, say analysts. TFBs carried coupon of 8.6-8.9% in FY14.
The coupon rate is benchmarked against the government securities of equal maturity. As per the FY14 norms, coupon rate on tax exempt notes sold by AAA-rated issuers were set at least 55 basis points lower than that on corresponding sovereign bonds if the debt is sold to individual investors, and 80bps if placed with non-retail buyers.
If the coupon rate of 10-year government paper is 7.72%, that would mean the coupon rate for TFBs of the same tenure would be 7.17% (it could be around 7.5%-8% for 15-year and 20-year TFBs depending on issuer’s rating).
Since there is no tax on interest income, the effective return for an individual paying 30.9% tax rate, would be 10.37% on a 10-year TFB with a coupon of 7.17%.
Since TFBs are also listed and traded on stock exchanges, investors could book profits when prices of bonds move upward, typically at the time of a falling interest rate scenario. There is no lock-in period for investments in TFBs.
“Even if the coupon rate is between 7.5%-8%, still it will get a good response from investors because any income instrument they invest apart from tax free bonds for regular income, are taxable,” said Jitendra P.S.Solanki, founder of JS Financial Advisors.
To return in october
* Seven companies to issue tax-free bonds worth Rs 40,000 in FY16
* NHAI, IRFC, HUDCO, IRNEDA, NTPC, REC and PFC to issue TFBs
* TFBs would be attractive for investors if coupon rate is 7.5-8%, analysts say