HUDCO Tax Free Bond - Opening on 17 September

HOUSING AND URBAN DEVELOPMENT CORPORATION LIMITED

After the REC tax-free bonds, the next company to come up with such an issue is Housing and Urban Development Corporation Limited (HUDCO). The company will be launching its issue from the coming Tuesday, September 17.

As compared to REC’s 8.26% (10Y), 8.71% (15Y) and 8.62% (20Y), HUDCO is offering 8.39%, 8.76% and 8.74% rate of interest for the respective tenors.

Though the interest will be paid annually but the date is not available. No prospectus available on company’s website.

HUDCO is raising total Rs. 5,000 crore from this tax-free bonds issue in this financial year, out of which it has already raised Rs. 190.80 crore through private placement. So, now it plans to raise the remaining Rs. 4,809.20 crore through this public issue, including the green-shoe option of Rs. 4,059.20 crore. The base issue size is Rs. 750 crore.

The official closing date of the issue is October 14 and the company may extend or preclose the issue, depending on the investors’ response to the issue.

The main features of REC issue as maintained below:

Rating of the issue - CARE and India Ratings have assigned a rating of ‘AA+’ to this issue, which is also ‘Secured’ in nature. HUDCO is wholly-

owned by the government of India, so the investors’ investment is quite safe.

Listing - HUDCO will get these bonds listed only on the Bombay Stock Exchange (BSE). The allotment and the listing will happen within 12 working days from the closing date of the issue. Investors can apply for these bonds either in physical form or in demat form, as per their comfort and requirement.

Interest on Application Money & Refund - The investors will get interest on their application money also, from the date of investment till the deemed date of allotment, at the same rate of interest as the applicable coupon rate is. Unlike REC issue which is to pay 5% p.a. interest on the refund money, HUDCO will pay the applicable coupon rate.

Categories of Investors & Basis of Allotment - The investors again have been classified in the following four categories and each category will have certain percentage of the issue reserved for the allotment:

Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue is reserved

Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved

Category III – High Net Worth Individuals including HUFs, NRIs & QFIs – 30% of the issue is reserved

Category IV – Resident Indian Individuals including HUFs, NRIs & QFIs – 40% of the issue is reserved

QIBs portion had 20% of the issue reserved in the REC issue and after observing their response in that issue, their reserved portion has been reduced to 10% in this issue. Category III HNI investors will get this 10% share of the pie. NRIs are eligible to invest in this issue as well, on a repatriation basis as well as on non-repatriation basis. Qualified Foreign Investors (QFIs) are also eligible.

Minimum & Maximum Investment - There is no change in the minimum investment requirement of Rs. 5,000 i.e. at least 5 bonds of Rs. 1,000 face value each. Retail Investors’ investment limit stands at Rs. 10 lakhs, beyond which they will be considered as HNIs and will get a lower rate of interest.

Interest rates of this issue look very attractive for the investor. I think it is good investment option for the investor of any tax bracket. Investors must go with it for safe and reasonable return.

For more detail about any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi, Certified Financial Planner

Arvind.trivedi79@gmail.com

Tax free bond - best option for long tenure

Debt Market Investment

At the current economic scenario debt investment would be one of the best options. Bonds and fixed deposits have safety element and gives reasonable returns. Tax free corporate bonds are returning around 13% return. It is the main reason that investor are back to these tax free bonds.

At present Rural Electrification Corp. Ltd (REC Ltd) is available for investors. It offer 8.26% annualized yield to retail investors for 10 year maturity period. It has raised more than Rs 4300 crore in the past two weeks. Investors are grabbing this opportunity as they know that this high yield may not sustain in this high level.

Many bank fixed deposits offer 8.5-9 percent-at least in the short term. Bonds are even better. For example, NHAI tax-free bonds can be bought from the market for around Rs 1,084 (10-year bonds, maturing in 2022), giving a yield to maturity of 8.1-8.2 percent. Adjusted for the top tax bracket, this gives nearly 12 percent annual yield, well above inflation. Tax-free bonds are issued only by government-owned companies, and to that extent they are also safe from defaults.

According to finance ministry sources, India will allow to international funds to invest in tax free bonds with attractive return. The high subscription of these types of bonds would give a new boost to our economy as these investments are long term investments. The government can use this fund to develop the infrastructure, new power plants, road etc. and as a result investor’s confidence would come back for India.

State companies bonds with tax free interest consider best combination of returns and safety. In the present highly volatile market, tax free bonds are offering possibly highest returns to investors. According to me, it is very good opportunity to 30% tax bracket investors as the return in these bonds are total tax free and reasonable for 10 year tenure.

For more detail about any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi, Certified Financial Planner

Arvind.trivedi79@gmail.com

REC Tax Free Bonds

REC Tax Free Bond : Is it right tax saving instrument for every tax payer ?

Rural Electrification Corporation (REC) is the first company to start offering tax free bonds in this financial year 2012 – 13 and their issue opens on December 3rd 2012 and ends on December 10 2012. Such type of issues may come sure in next 3 months. Now the common question among investors whether they should invest or not in this tax free bond issue.

Why you should invest ?

First of all it is ideal instrument for 30% or 20% tax bracket investors only. There is not much difference in different companies tax free bond. More or less almost all companies offer same return and for the security issue of your investment amount, these all issues are secured by government’s support. If you invest in bank fix deposit, the money insured up to Rs 1 lakh only. So for security of your investment amount these bonds have more score than bank fix deposit.
Interest income on these bonds being tax-free, the returns are higher than the after-tax returns on bank fixed deposits for investors in the 30 per cent tax bracket. The maximum highest interest rate available on bank deposits is 9.5 per cent compounded quarterly after tax adjusted return it gives 6.8% to 30 percent tax slab investor. So it is much lower than the REC tax free bond offer. It is the best option for 30% tax bracket investors. For 20 % tax bracket investor it is not much attractive for return wise but at the safety point of view they also can consider it. The interest rate on tax free bonds is also capped to the average G-Sec yield of the same maturity so there’s not much you can expect in terms of a better rate.

Features of REC Tax Free Bond Issue

There are two series of bonds, one with a 10 year maturity and another with a 15 year maturity and then there are 4 categories of investors that can invest in them. Retail investors are under category IV an get 7.72 % for 10 year and 7.88% for 15 years tenure.
It is available in both physical and dematerialized form. It means that no demat account is necessary to buy these bonds. Bonds will be listed within 15 days of closing of issue on both NSE and BSE. This bonds are exempt under Section 10 (15)(iv)(h) of the Income Tax Act 1961.
There are four categories of investors for these bonds and the last category of investors which is the retail category get a higher interest rate (half a percent). A retail investor is someone who invests less than Rs. 10 lakhs in these bonds.
It has got excellent rating from rating agencies. They have been rated CRISIL AAA/Stable by CRISIL, CARE AAA by CARE, IND AAA by IRRPL and ICRA AAA by ICRA. The interest on the REC tax free bonds will be paid once a year on December 1st.
If you purchase it from secondary market then you will get lower rate from primary market (directly from company) and this difference is half percent.
In the last I would like to say that it is good investment avenue for 30 % and 20% tax bracket investor. But keep in mind first plan your sec 80(c) tax deduction benefit and after that you should plan such types of bonds.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Are you confused between NCDs and FDs ?

Now a days many companies such as India Infoline Finance Ltd, Shriram City Union Finance has came out with Non-Convertible Debenture (NCD) issues. There are some confusion among the investors what are these NCDs and how different are they from Fixed Deposits (FDs)?

Like Fixed Deposits (FDs), infrastructure bonds and tax-free bonds, companies use NCDs as another route to raise capital. For investors, an NCD is another investment option available on the debt side.

Similarities between NCDs & FDs

NCDs and FDs are similar in a few ways. For example, like FDs, the NCDs are issued by companies for varying time periods such as 400 days, three years, five years.

You can choose to receive the interest at maturity (cumulative option) or choose to receive it at certain intervals (non-cumulative option) if you require regular cash flows, just like you do for FDs. While bank and company FDs are not credit rated, both NBFC FDs and NCDs are rated by agencies such as CRISIL, ICRA or CARE.

Like in company FDs, the credit rating on NCDs serve as a important factor  to differentiate the less risky offers from the more risky ones. For example, NCDs from both Manappuram Finance and Shriram City Union Finance were open simultaneously in August 2011, but while the former was given an AA- rating by CARE, the latter was rated AA, a notch higher, by the same agency. For both FDs and NCDs, the interest is not tax free. It is taxed under the head ‘Income from Other Sources’ at the slab rates.

Differences between NCDs and FDs

There are some distinction between these instruments. First, NCDs can either be secured or unsecured. A ‘secured’ NCD would mean that, in case the company is liquidated, the NCD holders would be given a priority in repayment of money due to them as they are secured by a charge on any of the assets of the company.

In this context, unsecured NCDs will be riskier, but companies compensate this by providing comparatively higher interest rates on these. The same with NCDs, having a lower credit rating.

In FDs, there is no concept of secured or unsecured FDs. Bank FDs are generally covered by deposit insurance upto Rs 1 lakh.  As this insurance is not available for other FDs, they are comparatively riskier.  Secondly, investments in a five-year FD from scheduled banks are entitled to deduction under Sec 80C. NCDs of a similar tenure don’t enjoy this benefit. Besides, if FD interest is higher than Rs 10,000, tax is deducted at source (TDS) itself. There is no TDS for NCDs. Unlike FDs, they are mostly issued in demat form. Hence, investors may require a demat account.

The most important difference is that unlike FDs, NCDs can be listed and traded in the stock exchange, although the liquidity may not be too high. A downward movement in interest rates for example, could lead to appreciation in the value of the NCD. Selling the NCDs in the market will attract short/long-term capital gains tax.

If you have any query about investment and any financial product. please feel free to ask me.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com