HNIs' backdoor entry to NHAI, PFC bonds

Following over-subscription in their category, offer Rs 7,000-8,000 to small investors for each application on their behalf.

The rich are getting greedy about the tax-free bonds on offer. Aiming to corner a larger pie than they are entitled to of the ongoing bond issues of the National High-ways Authority of India (NHAI) and Power Finance Corpo-ration (PFC), many high net worth individuals (HNIs) and stock brokers have set their eyes on the retail portion of the two offerings.

Small investors are being paid Rs 7,000-8,000 each to subscribe for the issues on behalf of HNIs, say sources in debt and equity broking firms.

The Rs 10,000-crore bond issue of NHAI closes for subscription on Thursday, over a week ahead of its original closing date. It saw over-subscription in the HNI and institutional investor category but the retail portion is yet to be filled. Similarly, the Rs 5,000-crore PFC bond issue is likely to close ahead of its last subscription date of January 16.

HNIs and brokers believe these bonds will list well above face value, with a considerable market once the Reserve Bank cuts key interest rates, say analysts. There is already a perception that a rate cut is round the corner. Interest rates and bond prices move in opposite direction; so, when the former falls, the latter will rise. Also, the bond price will rise as the cutoff date for paying interest, which is March 31, nears.

Such a bidding frenzy in the grey market for a bond issue was earlier seen last February, when State Bank of India (SBI) had hit the market with an offering. Stock brokers had paid up to Rs 16,000 to retail investors per application of Rs 5,00,000. The premium being offered was Rs 320 per bond with a face value of Rs 10,000.

The SBI Bond ‘N’ series was listed at a premium of Rs 365 on the National Stock Exchange against the face value of Rs 10,000. During the day, the counter also touched a high of Rs 10,385 before it closed at Rs 10,250. Investors made around Rs 20,000 on each of those bonds, including the interest paid on cut-off date, as the issue was listed in mid-March.

“Instead of buying from the market after the bonds list, most HNIs are looking to corner these now. Who wants to pay a higher price later?” said a dealer from a Mumbai-based broking agency.

For an individual in the highest tax bracket of 30.9 per cent, the 10-year 8.2 per cent tax-free bond of NHAI gives an effective return of 11.87 per cent. The 15-year 8.3 per cent bond gives 12.01 per cent. These are way better than bank fixed deposits, that are taxed even if they offer as much as 9.5 per cent or 10 per cent. Similarly, the bond of PFC, with a coupon of 8.3 per cent and 8.4 per cent for maturity periods of 10 and 15 years, respectively, would yield more than 10 per cent. Sovereign backing to the NHAI bonds, meaning guaranteed return even if the entity suffers losses, adds to the attraction for HNI’s.

For brokers, whose business was down, there is a one per cent commission on such deals. Finance is available for small investors who cannot put in the entire subscription money of Rs 5,00,000. They have to bring in Rs 50,000 and the rest will be financed by the broker, who will charge one per cent interest. Even so, a retail applicant stands to take home Rs 3,000. After the bonds list, the retail allottee will sell and the HNI will buy at the market price. The difference will be settled in cash between them. For a retail investor, it amounts to a 0.6 per cent to 1.6 per cent return for 15 days.

In the bond issue of NHAI, where 30 per cent is reserved for the retail category, and PFC where the reservation for retail investors is 25 per cent, lead managers say not even half of this has been utilised. On the other hand, HNIs and institutions are not likely to get their desired quantity, as their portion in both were oversubscribed several times. In NHAI, the HNI portion saw demand worth Rs 8,120 crore against Rs 3,000 crore of bonds on sale. The institutional category of NHAI saw demand for Rs 24,533 crore against Rs 4,000 crore of bonds for sale.