IREDA - Tax Free Bonds

By Research Desk
about 6 years ago
IREDA - Tax Free Bonds

By Geetanjali Kedia

 

Introduction: Indian Renewable Energy Development Agency Limited (IREDA) is entering the debt capital market, for the first time ever, on 17th February 2014, 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 March 2014, has a size of Rs.500 crore, with an option in company’s hand to retain an oversubscription of Rs.500 crore, aggregating to Rs. 1,000 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: Highest credit rating of AAA by Brickwork and CARE, indicating highest degree of safety regarding timely servicing of financial obligations.

Listing: Proposed to be listed on BSE and 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.

 

 

 

  • For retail investors*

8.41%

8.80%

8.80%

  • Other than retail investors

8.16%

8.55%

8.55%

Tax-effective Yield (%) p.a. (assuming 30.90% tax rate)

 

 

 

  • For retail investors*

12.17%

12.74%

12.74%

  • Other than retail investors

11.81%

12.37%

12.37%

*Retail investors defined as application upto Rs. 10 lakh from resident individuals, HUF, NRIs and QFIs being individual.

 

Allocation Ratio: 40% for retail, 30% for HNIs, 20% for corporates and 10% for QIBs.

 

Rate of Return: Both 15 year and 20 year (Series 2 and 3) bonds carry equal coupon rates of 8.80% per annum. This is comparable to a 12.74% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. This is an attractive rate vis-à-vis bank FDs as no bank is offering double digit interest rates on long term deposits now.

 

Good comparison of these coupon rates cannot be made:

  1. This is the only tax free bond open for subscription currently
  2. A maiden issue from the company, hence no basis for past performance of earlier issues
  3. Liquidity in other listed tax-free bonds of PSUs very thin, hence the yields not a true reflection.  

 

Recommendation: Given the highest triple-A rating, those with surplus funds for deploying in fixed income securities over long tenure can apply in this issue.

 

 

 

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