The central board of direct taxes has recently allowed four firms to rise up to 30000 crore though the issue of tax free bonds in FY 12.Tax free bounds means that the interest earned from these bounds is exempt under the income tax Act and is not added while computing the total income .The national highway authority of India (NHAI) and the Indian railway finance corporation (IRFC) have been allowed to raise up to 100000 crore, while the housing and Urban development (HUDCO) and power finance corporation (PFC) have both been allowed to rise up to 5000crore .
NHAI is an autonomous authority of the government of India under the ministry of road transport and highway (MORTH). The main objective of NHAI is the development maintenance and management of the national highway entrusted to it by the government of India .The infrastructure sector has been the prime factor in the growth story of India, and road development has been the focus within that. NHAI has been at the forefront for the same .NHAI is now tapping the market to raise funds aggregating to 5000crore, with an option to retain an oversubscription of up to 10000crore, through tax –free secured redeems –able non –convertible bounds.
The funds raised through this issue will be used to finance various upcoming project of the company .This issue opened on December 28,2011and will close on January 11, 2012. Of the total issue size, 40 percent is reserved for companies, Flls, mutual funds, etc. around 30 percent is for HNI investors, while the remaining 30 percent is retail individuals .The bound has the highest credit rating of “AAA’ of from CRISIL, CARE and the Fitch, indicating the highest level of safety and timely servicing of debt obligations This also tells us that the company has very strong fundamentals.
This minimum application size for the bonds is 50000 (50 bonds of 1000 each), following which one can apply in multiples of 1000 (1 bond).To be listed on the Bombay stock Exchange (BSE) and the national stock Exchange (NSF), there are two option available for investors in these bonds .Option I has a coupon rate of 8.30 percent for annum with a tenure of 15 years. Interest will be paid annually on October 1 of every year.
We are of the opinion that the Indian economy is growing at a very rapid pace, and in the longer run, we may not see the same kind of high interest rates that the being offered now .As the country grows the interest rates tend to reduce, which is evident from the fact that developed economies have very interest rates .So this is a good opportunity for long- term investor. However, the bound is more attractive to investors who come under higher tax brackets..In case of individuals who come under the highest tax bracket (30.9 percent), the effective yield work out to be 11.87 percent in the first option, while for the second option .the yield is 12.01 percent.
These bonds are unlike tax-saving infrastructure bonds which had a minimum lock-in period of five years and where the interest was taxable .Even though these bounds will be traded in the market , one should note that the volume in the exchange in quite low. Hence, liquidity could be one of the problems .Also these bonds are treated as long term capital assets if they are held for more than 12 months, and there will be no tax deduction at source on interest earned. Hence, one should invest in the bond if one has a longer-term Horizon and does not require funds in the short run.
We believe that investing in the second option is better, as it’s effective yield is greater than that of the fist one.
Source: Dalal Street Journal
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