REC's deep-discount zero-coupon bond issuance receives strong demand

REC Limited on Monday raised Rs 5,000 crore through CBDT-notified zero-coupon bonds (ZCBs) at an effective yield of 6.25 per cent per annum. The issue met with overwhelming demand, as the bond was oversubscribed seven times over the issue size of Rs 5,000 crore.

The issuance had a base issue size of Rs 1,000 crore, with a greenshoe option of Rs 4,000 crore. The company received bids worth Rs 33,670 crore, nearly 34 times the base issue.

ZCBs, issued at a deep discount and redeemed at face value, offer investors tax advantages, as the redemption is classified as long-term capital gains and taxed at a lower rate of 12.5 per cent per annum due to CBDT notification. Deep-discount bonds are typically issued at a discount of over 20 per cent to their face value and do not pay regular interest. Similar to zero-coupon bonds, this structure eliminates reinvestment risk for investors.

“The demand for the paper was better than expected,” said Ajay Manglunia, managing director and head (investment grade group), JM Financial. “Being a zero-coupon, the bonds don't have any investment risk either; the money basically gets reinvested at the same coupon. So all of those features and the rarity of the instrument led to the strong demand because these kinds of instruments these days are very, very uncommon,” he added.

The bonds received AAA ratings from four major credit rating agencies—CARE, Crisil, ICRA, and IRRPL.

“The market was expecting somewhere near 6.50 per cent to 6.75 per cent (yield),” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. “The bonds offer a significant advantage by providing long-term capital gains tax benefits, making them an attractive option for investors,” he added.

This marks REC’s first issuance of CBDT-notified ZCBs since FY11. A net pay-in of Rs 2,712.50 crore is scheduled for September 3, 2024, and the bonds will be listed on both BSE and NSE.