IRFC & REC Too Come Up With Tranche 2 Tax Free Bonds

IRFC and REC are next in line to issue tranche 2 of their tax free bonds, after PFC and HUDCO, whose issues are still on the stands. If one broadly recollects, we had advised our readers to apply a wait-and-watch approach before going ahead with any of these issues. We at DSIJ have looked upon all the issues to find out the best possible one and the ones that would best be avoided.

Firstly, we will look at two new issues, namely IRFC and REC which have decided raise funds through their second tranche. REC wishes to tap the market to raise an aggregate of Rs 100 crore with an option to retain over-subscription upto the Residual Shelf Limit of around Rs 2482 crore which is for this fiscal. IRFC is tapping the market to raise funds up to Rs 100 crore with an option to retain the residual shelf limit which is fixed by CBDT for the company for this fiscal. IRFC’s Tranche 1 issue has closed quite recently and hence the residual limit of the same is unknown.

If one considers both the issue, their offering to the investors is almost similar. Both the companies are coming out with the two options - a coupon rate of 7.38 per cent with a horizon of 10 years and tenure of 15 years with a coupon of 7.54 per cent. The minimum application for both the issues is Rs 5000 (i.e. 5 Bonds of a Face Value Rs 1000 each) and thereafter the application can be made in multiples of one bond i.e. Rs 1000. Further, they would be listed on the BSE and NSE. Both these issues are opening on February 25, 2013. However, IRFC closes on March 13, 2013, two days before REC, which would be closing its issue on March 15, 2013. One should note that if the issues are not subscribed upto the residual limit, we may see the closing date extended upto March 31, 2013.

Both the issues have offered a lowered interest rate when compared to its Tranche 1 issue, which came earlier this fiscal. IRFC is offering lower rates approximately by 30 basis points while REC is offering lower rates by 34 basis points. This is after the interest rates have softened in the past couple of months with the Reserve Bank of India (RBI) slashing the key repo rate by 25 basis points in its January month monetary meet.

Overall, we believe that there could be a possibility of some more companies coming up with this kind of issues. The PFC issue is similar to that of IRFC and REC in terms of the horizon and tenure that they are offering. While HUDCO is offering higher coupon rates of 15 basis points in both the options which it is offering.

We suppose that one could go with HUDCO’s tax free bonds as it is offering higher coupon rates compared to the other three companies namely REC, PFC and IRFC. For one’s reference, all these companies are PSUs and hence the risk associated with them is negligible. Investors could therefore go with the HUDCO Tax Free bonds and give a skip to the rest.