Retail investors can shop for Rs 10 lakh in REC bond issue

Retail investors can buy bonds of up to Rs 10 lakh in Rural Electrification Corporation’s (REC) proposed tax-free bond issue of Rs 5,000 crore. This is five times the limit allowed in typical initial public offerings, and the most retail investors can apply in any public issue.

Last financial year, in an REC tax-free bond issue, initially, it had allowed retail investment of up to only Rs 1 lakh.

“At least 75 per cent of the aggregate amount of bonds shall be raised through public issue. And, 40 per cent of such public issues shall be earmarked for retail investors,” said the draft prospectus.
 

TERMS OF REC TAX-FREE BONDS ISSUE

Size: Rs 5,000 crore

Public issue portion: Rs 3,750 crore

Earmarked for retail investors: 40 per cent of public issue

Tranches: One or more 

Retail investment limit: Rs 10 lakh

Bankers said these steps were part of the government’s efforts to encourage retail participation in the product. Tax-free bonds were introduced in Budget 2011-12, through which it allowed state-run infrastructure companies to raise long-term debt of up to Rs 30,000 crore. After the success of these bonds last financial year, Budget 2012-13 provided for the issuance of tax-free bonds of Rs 60,000 crore. The REC bond issue, expected to open early December, is the first public issue this financial year.

In a draft offer document filed with the Securities and Exchange Board of India last week, the company said to incentivise sellers, brokerage of up to 75 basis points would be paid on retail applications. So, for a single retail application of Rs 10 lakh, the broker would collect Rs 7,500.

The offer document described retail individual investors (category IV) as “investors applying for an amount aggregating up to and including Rs 10 lakh across all series in each tranche issue — resident Indian individuals and Hindu undivided families through a karta.” Investors applying for more than Rs 10 lakh of bonds can bid under the high net worth individuals segment (category III), in which the incentive for sellers is capped at 15 basis points.

Though the coupon rates of these instruments are yet to be announced, experts expect the rates to be about 7.6 per cent for retail investors, while for other classes, the coupon rate would be 50 basis points lower. According to the offer document, the ceiling coupon rate for AA rated issuers would be 50 basis points lower than the reference government security rate for retail individual investors and 100 basis points lower than the reference government security rate for other categories of investors such as qualified institutional buyers, corporate buyers and high net worth individuals.”

Arun Kejriwal, managing director, Kejriwal Research and Investment Services, said, “The move to increase the limit for retail investors would bring a number of high net worth individuals to the retail category and avail of the high coupon rate. To make optimum use of the retail quota, high net worth individuals can also apply for their relatives and family members.”

AK Capital, Enam Securities, Kotak Mahindra, SBI Capital and ICICI Securities are the lead managers for the issue.