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Despite low yields, public issue of REC tax-free bonds evokes good response

Rural Electrification Corporation’s public issue of tax-free bonds was on Tuesday over-subscribed by as much as four times, according to information provided by bond arrangers.

Rural Electrification Corporation’s public issue of tax-free bonds was on Tuesday over-subscribed by as much as four times, according to information provided by bond arrangers. Against the total size of R700 crore, the issue saw a subscription of R2,803.71 crore, market participants said.

The highest subscription was seen in the retail individual investor category where against R280 crore, investors put in bids worth R1,333.32 crore, leading to an over-subscription of 4.76 times. The corporate and HNI categories also saw over-subscription worth 4.37 and 3.26 times, respectively.

Ajay Manglunia, executive president-fixed income at Edelweiss Securities, says although the issue was over-subscribed four times, it is still a decent response considering that this was the third tax-free public issue of bonds in the current fiscal year and the yields were down 17-22 bps compared to previous issues. “The maximum response from the investors was seen in the 20-year segment,” he added.

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It is worth noting that the issue was priced after the Reserve Bank of India’s September 29 credit policy when the repo rate was cut by 50 bps. Since the tax-free bonds are priced on the basis of the yields on government securities, the fall in G-Sec yields after the repo rate cut was reflected in the coupons, according to market participants.

For the first time this fiscal, the public issue of tax-free bonds witnessed a coupon below 7% on 10-year paper for categories that include institutionals, corporates and HNIs.

REC’s bonds yield 6.89%, 7.09% and 7.18% on its 10-, 15- and 20-year tax-free bonds, respectively, for categories that include institutionals, corporates and HNIs. For retail individual investors, the coupon rates are 7.14%, 7.34% and 7.43% on 10,15 and 20 years, respectively.

Prior to this, Power Finance Corporation’s public issue of tax-free debt saw an overwhelming subscription to the tune of over 12 times the issue size. Against an issue size of R700 crore, investors bid for a whopping R8,461.17 crore, with a majority of the interest coming from qualified institutional buyers and the corporate categories. NHAI is next in line to come out with its public issue of tax-free bonds, according to market sources. NHAI has been allotted an overall quota of R24,000 crore to be raised through tax-free bonds.

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