Tax-free returns spark Rs 43,500-cr bond chase

Eight infra firms mop up their entire allotted amount of Rs 43,500 crore

Eight state-owned infrastructure companies raised their sanctioned amount of Rs 43,500 crore for 2015-16 through tax-free bonds, without sweat. The sum was the second-most raised in a financial year, since the introduction of these bonds in 2012-13.

Attractive coupon rates (considering they are net of any taxes) and dim outlook for other asset classes such as gold and equity, saw investors, particularly rich individuals and companies, flocking to these bonds.

The coupon rate (yield) on tax-free bond issues this financial year ranged between seven and 7.43 per cent. By rules, the coupon rate on tax-free bonds is pegged to the yield on similar-tenure government securities.

The bonds were offered in three tenures: 10-year, 15-year, and 20-year. The tax-free bonds are a tool given to infrastructure companies by the government to raise capital to boost spending. The Centre had permitted eight companies, including National Highways Authority of India (NHAI) and Indian Railway Finance Corporation (IRFC), to raise Rs 43,500 crore by public issue and private placement of tax-free bonds in 2015-16.

The demand for these instruments was so strong that almost all tax-free bond issues got lapped up on their first day itself. The bonds were sold on 'first come, first served' basis.

“Tax-free bonds have been a hit due to a number of reasons. There was high awareness among investors that these instruments are tax-free and liquid. Most investors have made good returns,” said Ajay Manglunia, executive vice-president, fixed income, Edelweiss Financial Services.

Tax-free bond issues by state-run firms were missing in the last financial year. In the next financial year, there may not be any issuance as tax-free bonds were not part of this year’s Budget. Last week, tax-free bonds by IRFC and Nabard (National Bank for Agriculture and Rural Development) were bought in minutes, said experts.

“The demand was especially strong as investors thought they would miss the bus next year,” said Manglunia.

Suresh Sadagopan, founder, Ladder7 Financial Advisories, said, “These instruments offered attractive yields amid decline in bank deposit rates.”

As these bonds are listed and traded on stock exchanges, investors can liquidate their holdings. Experts said the tax-free bonds offered better coupon rates than that in the secondary market, which attracted investors towards the public issue.

Weakness in the secondary market and change in the taxation structure on debt mutual funds attracted a lot of first-time investors, especially high-networth individuals (HNIs, or super-rich). This financial year, the Sensex is down 11 per cent, while returns offered by debt mutual funds have been around eight per cent pre-tax.

This financial year, the biggest mop-up through tax-free bonds was by NHAI at Rs 19,000 crore, followed by IRFC at Rs 9,500 crore and Nabard and Hudco at Rs 5,000 crore each.