Rural Electrification Corporation (REC) is the latest government owned company to come up with secured tax-free bonds. REC is an infrastructure financing company which predominantly funds power transmission and distribution projects. The rates offered by these bonds are attractive especially for investors in the higher tax-bracket.
The bond offers coupon rates of 7.93 per cent and 8.12 per cent for the 10- and 15-year options respectively. Retail investors can earn 0.20 percentage points more by way of interest, on investments of less than or equal to Rs 1 lakh in the public offer.
Why invest
For one, with policy rates expected to decline in the second half of this year; any subsequent tax-free bond offers may have lower interest rates.
Secondly, the rates offered by REC (including additional coupon) seem to be attractive as compared to bank deposits and corporate deposits today, after adjusting for tax.
While the interest received from REC bonds is tax-free, the interest received from bank or corporate deposits is taxed at your slab rate.
To equal the returns from the REC bonds, deposits with a 10-year maturity would need to offer interest of 10.3 per cent and 11.76 per cent respectively for those in the 20- and 30 per cent tax brackets. However, in reality, the highest interest rate offered by long-term bank deposits is no more than 10 per cent.
If one invests more than Rs1 lakh in the REC bonds, the coupon rate of 7.93 per cent on these bonds is equivalent to 10 per cent and 11.4 per cent respectively for people in the 20 and 30 tax brackets. Investors in bank deposits will not enjoy deposit insurance on sums beyond Rs1 lakh.
In this backdrop, REC bonds even appear to be the less risky option.
While investments in these bonds is most suitable for investors in higher tax brackets, investors who are looking for steady returns over a period of 15 years can also consider this offer.
Given that the bond is to be listed in the market, it can be sold mid-way in the secondary market. It is observed that the tax-free bonds of NHAI and IRFC are trading at a premium and also currently enjoying good trading volumes.
About REC
The transmission and distribution segment accounts for almost half the company's loan book as of December 2011 followed by generation projects. The company has around 78.4 per cent exposure to troubled State Electricity Boards which are reeling under heavy debt and accumulated losses. However, most of these loans are secured by assets and state government guarantees. Going forward, distribution sector reforms are expected to provide relief to REC and its peers.
The credit rating of REC is AAA which is the highest investment grade. The gross non-performing asset ratio as of December 2011 stood at 0.52 per cent.
REC's net profit was Rs 2,055 crore for the nine months ended December 2011. The capital adequacy ratio of 17.4 per cent is also high and will provide cushion against any defaults of SEBs. The net worth of REC is Rs 14,269 crore as of December 2011. Given that it is government owned company it can get capital support and other assistance as well.
Issue details
REC plans to raise Rs 1,500 crore with an option to retain an additional Rs 1,500 crore of subscription.
The issue opens on March 6 and closes on March 12 (the offer can be pre-closed).
Minimum application size is Rs 5,000.
Reservation: 25 per cent reserved for retail investors (investments of less than Rs 1 lakh); 25 per cent reserved for High Net worth Individuals. Allotment is First come first served.
Listing: Bonds will be listed on exchanges and will entail capital gains tax on exit through secondary market.