6 PSUs seek govt nod to issue deep-discount bonds, long-tenor debt

At least six Indian state-run companies have sought government approval to issue deep-discount bonds, opting for a rarely used corporate bond structure to raise relatively cheaper funds, four sources aware of the matter said on Tuesday.

 

These companies are Indian Railway Finance Corp (IRFC) , Indian Renewable Energy Development Agency (IREDA) , Power Grid Corp of India (PGC), REC, SIDBI and NABARD, the sources said.

 

REC has yet again sought permission to issue these bonds, after having raised 50 billion rupees ($587 million) similarly in September, when aggressive bids led to lower-than-expected yields.

 

REC confirmed the development but none of the other firms replied to Reuters emails seeking comment.

 

Deep-discount bonds are generally issued at a more than 20%-25% discount to their face value and do not pay regular interest, a feature similar to zero-coupon notes that removes reinvestment risks.

 

The surge in interest from companies to raise funds via these bonds is because they reduce overall borrowing costs in an environment when interest rates are seen falling further. 

 

For investors, these bonds, though not tax-free, offer a significant long-term capital gains benefit. That, along with the rarity of such issues, is boosting demand for such notes, bankers said.

 

"At maturity, investors receive a profit which is taxable as per capital gains rates. This helps reduce the effective tax rate for investors making zero-coupon bonds attractive," said Nikhil Aggarwal, founder and CEO of online bond trading platform Grip Invest.

 

Last week, Housing and Urban Development Corp (HUDCO) became the third state-run company to get approval to issue these bonds.

 

"HUDCO was the most likely candidate and they have got the approval and we expect REC and IRFC to be the next likely candidates," one of the sources said.

 

The sources said the government's approval may come in phases as they are not comfortable with a surge in the supply of zero-coupon bonds. The sources refused to be identified as they are not authorised to speak to the media.

 

HUDCO got approval to raise 50 billion rupees through bonds with a maturity of 10 years and one month, while Power Finance Corp (PFC) was approved to raise 100 billion rupees in March. Both have until the end of March 2027 to raise these funds.