Nabard gets approval to raise ₹19.5K cr via deep-discount zero-coupon bonds

India's National Bank for Agriculture and Rural Development (Nabard) has obtained federal government approval to raise up to Rs 19,500 crore ($2.3 billion) through deep-discount bonds.

 

Nabard can raise funds via these deep-discount zero-coupon bonds, which mature in 10 years, 11 months, and 13 days, until the end of March 2027, a government document showed on Friday.

 

Deep-discount bonds are typically issued at a discount of over 20-25 per cent to their face value and do not pay regular interest, similar to zero-coupon notes.

 

This feature eliminates reinvestment risks, as the bonds are redeemed at face value at maturity.

   

Since March, this is the fifth time the government has approved a state-run firm to issue deep-discount debt, and is the largest amount approved so far.

 

Earlier this month, state-run REC also received a government nod to issue these bonds.

 

In March, Power Finance Corp was allowed to issue Rs 10,000 crore of such debt, followed by Housing and Urban Development Corp in April, and Indian Railway Finance Corp was given the go-ahead in May . All these firms must complete their fundraising by the end of March 2027.

 

While the state-run firms have been rushing to seek approval for this rare corporate structure, these issues have not seen sufficient demand from investors.

 

"Zero-Coupon Bonds have hit a rough patch lately, with the last issue was pulled back due to muted investor appetite and upward pressure on yield expectations. But this near-term hiccup doesn't alter the structural appeal of ZCBs particularly in a softening rate cycle," said Venkatakrishnan Srinivasan, founder and managing partner at debt advisory firm Rockfort Fincap.

 

"If priced right by the investors in the primary market, ZCBs can be attractive, aiming to lock in duration without worrying about reinvestment risk. Plus, the deep discount structure offers potential tax efficiency under current capital gains norms, making them worth a closer look despite current bid-ask mismatches," Srinivasan added.

 

Weak investor demand led to the withdrawal of two recent issues, including Power Finance Corp's planned deep-discount debt issue on June 9.

 

The state-owned company received bids worth just Rs 14,700 crore ($171.91 million), against its target of Rs 2000 crore, which had a base issue size of Rs 500 crores.