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Mega Public Issue of Tax Free Bonds worth Rs.4532 crores

[Don't miss the 'MOST IMPORTANT' note at the end.]

IRFC has announced the opening of its Mega Public Issue of Tax Free Bonds tomorrow i.e. Dec 8, 2015.

At Rs.4500+ crores, it is nearly 6.5 times bigger than the earlier issues of tax free bonds from NTPC, PFC and REC (they all were worth Rs.700 crores each).

Given the overwhelming response and demand, many investors were left empty-handed in the previous issues. But, hopefully this time around, they won't be (too) disappointed.

Moreover, other gigantic issues are still in the pipeline, viz.:
- National Highways Authority of India (NHAI) : Rs.24,000 crores
- Housing and Urban Development Corporation (HUDCO) : Rs.5,000 crores
- Indian Renewable Energy Development Agency (IREDA) : Rs.2,000 crores

IRFC's Mega Public Issue of Tax Free Bonds

IRFC (Indian Railway Finance Corporation) is a Govt. of India enterprise. The details of the Tranche I of its mega public issue of Tax Free Secured Redeemable Non-Convertible Bonds, for the financial year 2015-16, are given below:

Bond Tenure : 10 years, 15 years and 20 years
Face value : Rs.1,000 per bond
Minimum subscription : Rs.5,000 (5 bonds of Rs.1,000 each)
Issue period : Dec 8 to Dec 21, 2015 (with an option for early closure or extension)

Rate of interest
Retail Investors : 10-yr bonds - 7.32%. 15-yr bonds - 7.53%.  20-yr bonds - 7.50%
Other Investors : 10-yr bonds - 7.07%. 15-yr bonds - 7.28%.  20-yr bonds - 7.25%
Interest payment : Payable annually

Retail Investors : Individuals, HUFs and NRIs (on non-repatriation basis) investing up to Rs.10 lakhs.
High Net Worth Individuals : Individuals, HUFs and NRIs (on non-repatriation basis) investing more than Rs.10 lakhs.

IRFC's Rs.4500+ crores Mega Public Issue of Tax Free Bonds 

Issue size : Base amount = Rs.1000 crores; Over-subscription = Rs.3532 crores. Total size = Rs.4532 crores.
Allotment : 40% of the issue size reserved for retail investors which would be allotted on 'First Come First Serve' basis

Rating : CRISIL AAA, ICRA AAA (Stable) and CARE AAA [These ratings indicate the highest degree of safety regarding timely servicing of the debt and lowest credit risk.] 

Liquidity : To be listed on BSE and NSE
Loan : Borrowing permitted by pledging these bonds
Put / Call : No put or call option
Form : Both in Physical and Dematerialized form
Nomination : Allowed

Permanent Account Number (PAN) : Mandatory

1. Since trading in bonds is normally not very active, don't expect too much liquidity when listed. Therefore, if you can afford to lock-in your money for 10/15/20 years, this makes a good choice to earn tax-free income.

2. The tax-free aspect is only for the interest income. If you sell before maturity, the capital gains will be taxable. Short-term capital gains (holding period up to 12 months) will be added to your income and taxed as per your slab rate. Long term capital gains (holding period more than 12 months) will be taxed @10%. These bonds are NOT eligible for indexation benefit.

Interest rates on tax-free bonds are fixed, based on the G-Sec (Govt. Securities) interest rates prevailing around the time of the public issue.

As I had mentioned earlier in Sept 2015, when the NTPC's Public Issue of Tax Free Bonds had opened, that there were good chances of Reserve Bank of India cutting the policy interest rates in the near future. 

Subsequently, RBI did slash the policy rates by 0.5%.

Therefore, as expected, the market interest rates of G-Secs have dropped. This is reflected in the lower interest rates for the REC Public Issue earlier and now the IRFC's issue. [NTPC and PFC bonds offered slightly higher rates : 7.36% / 7.53% / 7.62% for 10 / 15 / 20-year bonds for the retail investors].

Thankfully, despite the rather sharp rate cut by RBI, markets rates have not corrected much.

The rate reduction by RBI was quite significant. Hence, no further moderation in interest rates is expected in the next few months. As such, the future issues of tax free bonds would most probably be offered at around the same rates as the recent REC / IRFC issues. However, if the banks drop their base rates, then the G-Sec rates would also drop. This would lead to lower interest rates on future issues of tax free bonds.

In view of the foregoing, this is a good time to apply for tax free bonds.

Of course, as I have often advised:

a) You don't have to wait for the public issues to invest in tax free bonds. [Still Craving For Tax Free Bonds?]

b) There are better options available [Why Tax-Free Bonds Don't Excite Me?]

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