IIFCL - Tax Free Bonds
By Geetanjali Kedia
Introduction: India Infrastructure Finance Company Limited (IIFCL), providing long term financial assistance to infra projects and wholly owned by the Government of India, is entering the debt capital market for the second time this fiscal (after October 2013), on 9th December 2013, with an issue of Tax Free Bonds of face value of Rs.1,000 each, in the nature of Secured Redeemable Non Convertible Debentures.
Issue Details: Issue, closing on 10th January 2014, has a size of Rs.1,000 crore, with an option in company’s hand to retain an oversubscription upto Rs.2,000 crore. 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. Being tax-free, the interest does not attract TDS nor do the bonds attract wealth tax. Also, the bonds do not have any lock-in period.
Rating: Bonds, rated AAA by ICRA, BWR, CARE and India Rating indicate highest degree of safety regarding timely servicing of financial obligations.
Listing: Bonds, proposed to be listed on NSE, are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Trading lot is one bond and must be necessarily in done demat form only.
What’s on offer: Bonds have three different series under which they are being offered:
| Particulars | Series 1 | Series 2 | Series 3 |
| Tenor | 10 Years | 15 Years | 20 Years |
| Interest Payment | Annual | Annual | Annual |
| Coupon Rate (%) p.a. |
|
| |
| 8.66% | 8.73% | 8.91% |
| 8.41% | 8.48% | 8.66% |
| Tax-effective Yield (%) p.a. (assuming 30.90% tax rate) |
|
| |
| 12.53% | 12.63% | 12.89% |
| 12.17% | 12.27% | 12.53% |
*Retail investors defined as application upto Rs. 10 lakh from resident individuals, HUF, NRIs and QFIs being individual.
Rate of Return: IIFCL is offering an attractive 8.91% pa coupon for 20 year period, which was same as NTPC’s 20 year issue (closed early on 5th December against closing date of 16th December 2013), as both had same AAA credit rating. The current offering is much better than the October issue from the same company, when 8.75% was offered for 20 years i.e. it is 16 basis points higher.
The highest coupon rate, in the 20 year (Series 3) bonds, is comparable to a 12.89% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. This is very attractive rate as currently no bank is offering double digit interest rates on long term deposits.
IIFCL’s offering must be compared with HUDCO tax free bonds, which opened for subscription on 2nd December and are currently underway. Since IIFCL enjoys better credit rating (AAA) than HUDCO (AA+), its coupon rates are lower than the latter’s offering. However, both being PSUs where timely interest and principal repayment is not a concern, the coupon rate must be the sole deciding factor, where HUDCO scores over IIFCL by a good 10 basis point (9.01% pa coupon for Series 3).
Recommendation: Current HUDCO bonds more attractive than IIFCL’s offering. Hence pass this one in favour of HUDCO.