Tax free bonds emerge goldmine as big demand raises listing premium

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ISSUERS of tax-free bonds must be thanking the Reserve Bank of India (RBI) governor D Subbarao for the bounty that he has bestowed on them. Thanks to the RBI rate cut, resulting in falling yields on gilts and corporate bonds, the public issues of Housing and Urban Development Corporation (Hudco) and Indian Railway Finance Corporation (IRFC) tax-free bonds have seen heavy oversubscriptions.

Tax-free bond offerings by these two enterprises have witnessed a late surge in investor interest with the IRFC tax-free bonds oversubscribed 5.38 times, while Hudco was oversubscribed 2.95 times. Both issues closed last week.

Within a month, the scenario has completely changed. Yields in the primary market are now superior to yields being offered in the secondary market, even without factoring in brokerage costs, said experts. In contrast, when these tax-free bond issues opened for subscription, the yields they were offering were far inferior to those available in the secondary market. BESIDES offering attractive tax-free interest income, perhaps what drove investors' interest in these bonds, was the quick gains on exit that these bonds are expected to provide to short-term investors. Due to high yield they offer compared with the prevailing yield in the secondary market, these fresh issuances of tax-free bonds are likely to list at a premium to their face value, said financial planners.

Highest safety-rated tax free bonds of 10-year maturity with coupon rate of 8.2 per cent, issued by National Highway Authority of India (NHAI) last year, are available at a yield of 7.09 per cent and a price of Rs 1,097.25 for a Rs 1,000 bond, while NHAI's 15-year tax-free bond with a coupon rate of 8.3 per cent is available at a yield of 7.29 per cent and a price of Rs 1,116 for a bond of Rs 1,000 face value, data from Genome Capital showed.

Compare this with the yield offered by AAA-rated IRFC's 10-year bond of

7.68 per cent, you get a yield difference of 0.59 per cent, and with 15-year bond of 7.84 per cent, a yield difference of 0.55 per cent.

Brokers said that investors in IRFC bonds are betting that these will list at least a 5 per cent premium to their face value. This means an annualised return of around 60 per cent per annum, assuming the bonds are listed within a month of the issue close.

NHAI, National Housing Bank, Ennore Port, Jawaharlal Nehru Port Trust and Dredging Corporation of India have received government approval for issuing tax-free bonds this financial year.

Though, none of these issuers have so far come out with their tax-free bond issues. Should they wish to utilise the limits allocated by the government, they would have to do so between now and March 31.

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