REC tax-free issue sees good interest

Within five days, the Rs 3,500-cr tax-free offering has mopped up about Rs 2,900 cr

Rural Electrification Corporation (REC)’s tax-free bond issue, the first this season, saw good response and is on course to closing much ahead of schedule. Within five days, the Rs 3,500-crore tax-free offering has mopped up about Rs 2,900 crore, owing to investments from retail investors.

Lured by attractive yields, retail investors, with investment sizes of up to Rs 10 lakh, have invested Rs 1,220 crore so far, against the available Rs 1,400 crore. High net worth investors have put in bids worth Rs 720 crore, while companies and institutional investors have invested Rs 710 crore and Rs 250 crore, respectively.

About 40 per cent of the offering was reserved for retail investors; the remaining three categories account for 20 per cent each. Investment bankers said the issue might close on Friday or Monday, “as soon as it is fully covered”. The last day of the issue is September 23.  The core size of the offering is Rs 1,000 crore, with an option to subscribe an additional Rs 2,500 crore.

Last financial year, tax-free bond issues had seen lukewarm response. This was because the coupon rates were lower compared to this financial year. REC is offering bonds for 10-year, 15-year and 20-year tenures with coupon rates of 8.26 per cent, 8.71 per cent and 8.62 per cent respectively. The coupon rate is 25 basis points lower non-retail investors.

The benchmark 10-year 7.16 per cent government bond yield on Thursday ended at 8.42 per cent, compared with its previous close of 8.39 per cent. Bankers said the coupon rate offered by REC was attractive, as the spike in bond yields last month had been factored into the price.

The yield on the 10-year benchmark government bond had touched a record 9.23  per cent in August. Subsequently, it softened by 81 basis points.

This financial year, the government has allowed 13 public sector institutions to raise Rs  48,000 crore by issuing tax-free bonds to meet their infrastructure investment needs. Since G-Sec yields have been softening, other public sector institutions might offer tax-free bonds at a lower coupon rate.