The bonds will have a ceiling on the coupon rates based on the reference government security rate.
The reference government security rate would be the average of the base yield of G-Sec for equivalent maturity reported by Fixed Income Money Market and Derivative Association on a daily basis prevailing for two weeks ending the Friday immediately preceding the filing of the final prospectus with the stock exchange, or the Registrar of Companies in case of public issue and the issue opening date in case of private placements.
Bonds issued by India Infrastructure Finance Company (IIFCL) will have a tenure of 10, 15 and 20 years. For other companies, the tenure of the bonds will be for 10 and 15 years.
Retail individual investors, qualified institutional buyers, corporates and high net-worth investors can invest in the tax-free bonds in varying proportion. A finance ministry notification says that the ceiling coupon rate for AA rated issuers will be the reference G-Sec rate, less 50 basis points in case of retail individual investors and reference G-Sec rate, less 100 basis points in case of other investor segments like qualified institutional buyers, corporate and high net-worth individuals.
The notification has clarified that retail investors would be individual investors, Hindu Undivided Family (through Karta), non-resident Indians on repatriation basis as well as non-repatriation basis applying up to R10 lakh in each issue. Individual investors investing more than R10 lakh will be classified as high networth individuals.
In the Budget for 2012-13, former finance minister Pranab Mukherjee had proposed to raise R60,000 crore through tax-free bonds, which is double the amount raised in 2011-12. In fact, last year, to make tax-free bonds more attractive to retail investors, Indian Railway Finance Corporation was the first company to offer 20 basis point more to retail investors. Taking a cue from IRFC, even Hudco offered higher rates to retail investors provided they did not sell before the maturity of the bond.
The notification also underlines that in case the rating of the insurer entity is above AA, a reduction of 15 basis points will be made in the ceiling rate, compared to the ceiling rate for AA rated entities.
The ceiling rates will apply for annual payment of interest and in case the schedule of interest payments is altered to semi-annual, the interest rates will be reduced by 15 basis points. In case the bonds are transferred, except in case of transfer to legal heir in the event of death of the original investor, the higher rate of interest to retail investors will not be available.
At least 75% of the aggregate amount of bonds issued by each company will be raised through public issue and 40% of such public issue will have to be earmarked for retail investors.
Moreover, in a private placement, each company issuing the bond will have to go for the book-building approach according to the Regulations 11 of the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008. In this process, bids will have to be sought on the coupon rate subject to a ceiling specified by the entity and the allotment will be made at the price bid. While calling for bids, there will be no limit on the number of arrangers who can bid for the issue.
The bonds will have credit rating that will be assigned by a rating agency and approved by the Securities and Exchange Board of India as well as the Reserve Bank of India.
In a case where an entity has been rated differently by more than one rating agency, the lower of the two ratings will be considered. The merchant bankers will be selected through the competitive bidding process where the technical criteria for pre-qualification will be the total funds mobilised through public issue of debt and equity together over the past five years and after pre-qualification, the final selection will be based on financial bids.
The issue size will be limited to R500 crore for each tranche. Analysts say investing in tax-free bonds makes senses as it will give higher yield compared with bank fixed deposits.