Fewer tax-free bond issues likely this year

May be limited to a mere Rs 25,000 crore

The Union government is likely to issue far less of tax-free bonds this financial year, feel experts. Some believe it might be no more than half the Rs 50,000-crore of such bonds issued in 2013-14.

“These bonds cost a lot to the government,” said Nilesh Shah, managing director, Axis Capital.

In FY14, these bonds got a good response; the yield on the 10-year benchmark government bond had risen and these bonds are priced keeping that in mind.

“Tax-free bonds have enabled retail and high net worth investors to participate in the bond market in a big way. However, this has come at a huge cost, as the effective pre-tax yield has distorted the entire interest rate structure and taxation structure. I think these issuances, at 50 basis points lower than government securities are too expensive for the government. They need to have a re-look at the spreads and size,” said B Prasanna, MD of ICICI Securities Primary Dealership.

As the new government will try hard to cut the fiscal deficit, the amount allocated for tax-free bonds is expected to substantially come down. The deficit was 4.5 per cent of gross domestic product in FY14.

“Companies will only look at launching these (bonds) in the second half of the year, once the budgetary allocations are done. Given that issuances are likely to start after September, the size of the supply of tax-free bonds is expected to be Rs 25,000-30,000 crore, half of what it was last year. There could (also) be lesser appetite for these products this year because part of the investor money could flow into other asset classes like equities,” said K P Jeewan, head of fixed income, Karvy Stock Broking.