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Companies are expecting these issues to do well this year on relaxed norms and attractive rates " The gap between the G-Sec rate and the coupon rate has been reduced this year. Thus, the coupon rate has become attractive " Harsh Kumar Bhanwala Executive director, India Infrastructure Finance Company

WITH the government relaxing the norms for taxfree bond issuances and attractive coupon rate, companies are anticipating the issues to do well this year.

Tax-free bond issues through the private placements route have already witnessed a good response.

Rural Electrification Corporation (REC) public issue that opened on Friday was oversubscribed 1.83 times on the first day itself as per the NSE data. REC plans to raise Rs 1,000 crore, with an over-subscription option of Rs 2,500 crore. The issue closes on September 23 and is open for subscription in three tenures — 10 years, 15 years and 20 years. The taxfree coupon rate on these bonds will be 8.01 per cent, 8.46 per cent and 8.37 per cent for 10 years, 15 years and 20 years, respectively.

Retail investors will be offered the bonds at interest rates of 8.26 per cent, 8.71 per cent and 8.62 per cent, for 10 years, 15 years and 20 years, respectively.

"The private placement we did, at the same interest rates, was oversubscribed and hence, we expect good response to the tax-free bonds issue as well," Rajeev Sharma, chairman and managing director of REC had said in a press conference.

Says Harsh Kumar Bhanwala, executive director, India Infrastructure Finance Company, "The gap between the G-Sec rate and the coupon rate was more last year, which has been reduced this year. Therefore, the coupon rate has become attractive. This year, the reference rate allowed is 80 basis points less than the GSec rate two weeks prior to the issue week, compared with 115 basis points last year. Thus the effective rate comes to 12 per cent for those in the highest incometax bracket." According to the government notification, the ceiling coupon rate for AAA rated issuers shall be the reference G-Sec rate less 55 basis points in case of retail individual investors (RIIs) and reference G-Sec rate less 80 basis points in case of other investor segments. In case the rating of the issuer entity is AA+, the ceiling rate shall be 10 basis points above the ceiling rate for AAA rated entities. In case the rating of the issuer entity is AA or AA-, the ceiling rate shall be 20 basis points above the ceiling rate for AAA rated entities.

"We launched tax-free bonds under the private placement route in two tranches, both were oversubscribed and we collected Rs 1,800 crore. We would be seeking board approval on September 2 and by the end of the month would be coming out with the first tranche of the public issue of tax-free bonds. We have been autho rised to raise Rs 10,000 crore till March 2014. We may look at subsequent two tranches of private placement and three to four tranches of public issue," added Bhanwala.

"We are working on the timings of these issues and on how to reduce the expenses. Bringing out an issue in October, which is the festival season, may hit collections. Also, if other companies launch their issue at the same time, collections would get impacted," added Bhanwala.

The government has also enhanced the issue expense limit for companies to not more than 0.65 per cent of the issue size for public issue and 0.25 per cent for private placement. The issue expense would include all expenses relating to the issue like brokerage, advertisement, printing, registration, etc.

Says an official of SBI Capital Markets, "There is a fairly good demand of taxfree bonds this time as the pre-tax yield is coming to more than 12 per cent. From the REC response, it is evident that demand is high from retail investors too." Another attractive feature is that the government has done away with the `stepdown' clause. Till last year, an investor buying these bonds through the secondary market was not given the higher coupon rate offered for retail investors. The government has also allowed issuers to earmark suitable amounts within their private placement allocation for placing with sovereign wealth funds, pension and gratuity funds without the requirement of book building procedure.

According to the government notification, 40 per cent of a public issue of taxfree bonds has to be earmarked for retail individual investors and 20 per cent each for high net worth individuals, companies and qualified institutional buyers. Retail individual investors are those that invest less than Rs 10 lakh.

Last year, poor investor interest saw the 10 (authorised) public sector units raise only Rs 25,000 crore from tax-free bonds against an approval of Rs 60,000 crore. This year, the government has allowed 13 PSUs to raise Rs 48,000 crore by issuing tax-free bonds.

REC public issue that opened on Friday was oversubscribed 1.83 times on the first day itself The issue closes on Sept 23 and is open for subscription in three tenures -10, 15 and 20 years The coupon rate will be 8.01 per cent, 8.46 per cent and 8.37 per cent for 10, 15 and 20 years

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