Retail can shop for a million in REC tax free bond sale

Brokerage to get up to 75 bps as commission on retail applications

Retail investors can buy up to Rs 10 lakh in the Rs 5,000 crore tax free bond issue proposed by state-owned lender Rural Electrification Corporation (REC). This is five times the limit allowed in typical initial public offering and easily the highest retail investors can apply in any public issue. Last fiscal, when REC offered tax free bonds for  sale, it initially allowed retail investment of up to Rs 1 lakh only.

According to the draft prospectus, “atleast 75% of aggregate amount of bonds shall be raised through public issue. 40% of such public shall be earmarked for retail investors.”

 

These stipulations are part of the government efforts to maximise retail interest in this product, said bankers.  Tax free bonds were initially introduced by the finance minister in FY11-12 budget wherein it allowed state-run infrastructure companies to raise long term debt of up to Rs 30,000 crore. After the success of the instrument last fiscal, the budget provided for tax free bonds worth Rs 60,000 crore to be issued this year. REC’s sale, expected to open early December is the first of the public issues.

To incentivize sellers, the company has said in its draft offer document filed with the Securities and Exchange Board of India last week that brokerage of up to 75 basis points will be paid on retail applications. So, on a single retail application of Rs 10 lakh, the broker makes a handsome Rs 7500.

The offer document Described Retail individual investors (Category IV) as “investors applying for an amount aggregating upto    and including Rs 10 lacs ( Rs 0.1 crore) across all series in each tranche issue: 1) Resident Indian Individuals  and 2)Hindu Undivided Families through Karta.”

Similar investors applying for over Rs 10 lakh can bid under the High Net worth individuals (Category III). Incentive for sellers is capped at 15 basis points for this category.

Though the coupon rates of these instruments are yet to be public, experts expect the rates to be around 7.6% for the retail investors. For other classes, coupon rate will be 50 basis points lesser.

According to the document, “The ceiling coupon rate for AA rated issuers shall be the reference G-sec rate less 50 basis points in case of Retail Individual Investor (RII); and reference G-sec less 100 basis points in case of other investor segments, like Qualified Institutional Buyers (QIBs), Corporate and High Net Worth Individuals (HNIs).”

 Arun Kejriwal, managing director, Kejriwal Research and Investment Services, said, “ The move to increase the limit for retail investors will bring in a number of HNIs to come into the retail category and take advantage of the higher coupon rate. HNIs can apply for in names of relatives and family members to make the optimum use of the retail quota.”

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

 Terms of REC tax free bonds issue:
Size: Rs 5000 crore
Public issue portion: Rs 3,750 crore
Earmarked for Retail:  40 per cent of public issue
Tranches: one or more tranches
Retail investment limit: Rs 10 lakh