Introduction
Rural Electrification Corporation has entered the debt capital market, with an issue of Tax Free Bonds of face value of Rs. 1,000 each, in the nature of Secured usable Non Convertible Debentures {NCD’s}.
Issue Details
Issue Opens from 30th August 2013 and Issue, closing on 23rd September, has a size of Rs.1, 000 crore, with an option to retain an over subscription of Rs.2,500 crore, aggregating the issue size to Rs. 3,500. Minimum application is Rs. 5,000 and in multiples of Rs. 1,000 thereafter, while Allotment will be done on first come first serve basis. Interest rates on these bonds are fully exempt from Income Tax and TDS is not applicable. Wealth Tax is not levied on investment in bonds.
Rating
AAA/ Stable by CRISIL / IND AAA by IRRPL and AAA by CARE and ICRA.
Listing
Bonds, planned to be listed on Bombay Stock Exchange, are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Also, the bonds do not have any lock-in period.
Proffer of the Issue
Bonds have three different series under which they are being offered
| Particulars | Series 1 | Series 2 | Series 3 |
| Face Value per Bond | Rs 1,000 | ||
| Tenor – Years | 10 | 15 | 20 |
| Minimum Application | Rs 5,000 (in multiples of Rs 1,000 thereafter) | ||
| Coupon Rate % pa (Cat I, II and III) | 8.01 | 8.46 | 8.37 |
| Additional Coupon Rate % pa (Cat IV) | 0.25 | 0.25 | 0.25 |
| Total Coupon Rate % pa (Cat IV) | 8.26 | 8.71 | 8.62 |
| Effective yield % pa (Cat I, II and III) | 8.01 | 8.46 | 8.37 |
| Effective yield % pa (Cat IV) | 8.26 | 8.71 | 8.62 |
| Frequency of Interest payment | Annual | ||
| Issuance and Trading | Physical and Demat mode (trading in demat mode only) | ||
| Interest on application % pa | As per coupon rate applicable to investor category | ||
| Interest on refund % pa | 5.00 | ||
| Redemption | After 10 years from Allotment | After 15 years from Allotment | After 20 years from Allotment |
| Redemption Amount | Repayment of the face value with interest | ||
Issue Structure:
| Investor Category | I – Institutions | II – Corparates | III – HNI (more than 10 lacs) | IV – Retail (upto and including 10 lacs) |
| Issue allocation | 20% | 20% | 20% | 40% |
| *Basis of allotment: on first come first serve basis | ||||
Retail investors defined as application upto Rs. 10 lakh from resident individuals, HUF, NRIs and QFIs being individual. 40% of the issue is reserved for retail category with balance split equally among the other three categories of institutions, corporates and HNIs (over Rs. 10 lakh) respectively.
Company Background
A Navratna central PSU, REC provides interest bearing loans to state electricity boards (SEBs), power utilities and private sector for all segments of power infrastructure. In FY13, it posted topline of Rs. 13,526 crore and PAT of Rs. 3,833 crore, on networth of Rs. 17,529 crore. Earning NIMs of 4.70% in FY13, its loan book totaled Rs. 1.27 lakh crore, up 26% YoY. In Q1FY14, the company continued with its robust financial performance with revenue of Rs. 3,982 crore and PAT of Rs. 1,154 crore. Its current market cap stands at over Rs. 16,600 crore. Thus, the company is financially sound and secure.
Advice
The 15 year (Series 2) bonds, carrying the highest coupon rate, are analogous to a 12.60 percent pre-tax return is paid on additional fixed income gadgets, presumptuous the peak tax bracket of 31% for retail individuals. This is very attractive rate as currently no bank is offering double digit interest rates on long term deposits.
Earlier fifteen year bond issues made by Rural Electrification Corporation Limited in the last 12 months are currently trading with yields of 6-7.5% on NSE, albeit with extremely thin volumes, which make it incomparable with the current offering. We find the 8.71 percent rate very attractive which definitely deserves a look and an application form.