NHB Tax Free Bonds (Tranche-II) - Is it a worthy investment opportunity?
Mar 08, 2014

Author: PersonalFN Content & Research Team

Company Overview

National Housing Bank (NHB) was established in July 9, 1988 under the National Housing Bank Act, 1987. NHB is wholly owned by the Reserve Bank of India (RBI). It was set up to promote housing finance institutions and to provide financial and other support to such institutions. The main objective of the bank is to establish and promote a sound and stable housing finance system in India.

Business and Financial Analysis
NHB plays an important role in channelizing and catalysing the flow of credit in the housing sector. To promote the cause of affordable housing, NHB not only works closely with the state and central governments but also the entire lending industry. In its 25 years of existence, the bank has immensely contributed in the establishment and promotion of a diversified mortgage system. It has also been working towards integrating the housing finance market with the overall financial sector. In the financial year 2012-13, the bank recorded a profit of Rs 450 crores and the size of its balance sheet was in excess of Rs 38,700 crores. Moreover NHB's refinance disbursements in 2012-13 increased by 22% as compared to those made in 2011-12 and reached the highest amount ever (Rs 17,541.64 crores).

The details of the offering (Tax free bonds) are as follows:

Issuer	National Housing Bank
Offering	Public issue of the tax free bonds in the nature of secured redeemable non-convertible debentures of face value of Rs. 5,000/- each, having benefits under section 10(15)(iv)(h) of the Income Tax Act, proposed to be issued by NHB pursuant to the Shelf Prospectus and the relevant Tranche Prospectus(es). The issue size is Rs 250 Cr (Base Issue Size) with option to retain oversubscription upto residual shelf limit (being Rs 1000 Cr).
Rating	'CRISIL AAA'/Stable by CRISIL, '[ICRA] AAA' by ICRA and "CARE AAA" by CARE
Security	Pari passu floating first charge on the specific book debts of NHB as may be mentioned in the security documents and/ or Bond Trust Deed and as may be further notified by NHB to the Trustee, from time to time, with an asset cover of one time of the total outstanding amount of Bonds, from time to time.
Face Value	Rs 5,000 per bond
Issue Price	At par (Rs 5,000 per bond)
Minimum Subscription	1 bond (Rs 5,000) and in multiples of 1 bond thereafter
Tenure	Series I: 10 years , Series II: 15 years and Series III: 20 years
Coupon rate	(For Categories I, II, III) Tranche II: Series 1A: 8.25% p.a., Series 2A: 8.68% p.a. and Series 3A: 8.65% p.a. (For Categories IV) Tranche II: Series 1B: 8.50% p.a., Series 2B: 8.93% p.a. and Series 3B: 8.90% p.a.
Interest Payment	The date, which is the day falling one year from the Deemed Date of Allotment, in case of the first coupon / interest payment and the same day every year, until the Redemption Date for subsequent coupon / interest payment
Trustee	IL&FS Trust Company Limited
Listing	NSE. NSE being the Designated Stock Exchange for the Issue. The Bonds shall be listed on the NSE within 12 Working Days from the Issue Closure Date.
Depository	Central Depository Services (India) Limited ("CDSL") and National Securities Depository Limited ("NSDL")
Registrar	Karvy Computershare Private Limited
Issuance	Both in dematerialised form and in physical form, at the option of the applicant. However trading in bonds shall be compulsorily in dematerialised form only.
Issue Open Date	March 07, 2014
Issue Close Date	March 18, 2014
Quota	Category III - Upto 25% of Overall Issue Size* and Category IV - Upto 40% of Overall Issue Size*
Category III (Individuals & HUF applying more than Rs. 10 Lakh)	The following Investors applying for an amount aggregating to above Rs. 10 lakhs across all Series of Bonds in each Tranche Issue: Resident Indian individuals and Hindu Undivided Families through the Karta.
Category IV (Individuals & HUF applying upto Rs. 10 Lakh)	The following Investors applying for an amount aggregating to up to and including Rs. 10 lakhs across all Series of Bonds in each Tranche Issue: Resident Indian individuals and Hindu Undivided Families through the Karta.

(*on first come first serve basis to be determined on the basis of the bid uploads made with the scheduled Stock Exchanges) (Source: Issue Prospectus, PersonalFN Research)

Well, after reading the details of the tax free bonds (as provided above), there may still be some more questions cropping up, which are answered hereunder:

Is there a lock-in period for these bonds?

No, these bonds do not have any lock-in period. Post listing, the bonds can also be purchased and sold in the secondary market on the exchange at the prevailing market prices. However, the bonds will be redeemed only on maturity as there are no buy back options.
Is interest on these bonds Tax Free?

Yes, interest on these bonds is tax free.
Will TDS be deducted from the interest payment?

These bonds are tax free and hence not subject to TDS.
Is demat account mandatory to invest in tax free bonds?

No. The bond holder will have an option to take delivery in physical form. In case of Bonds are being issued in physical form, the Company will issue a Consolidated Bond Certificate for investments made under all series of Tranche- 1.
Are investments in these bonds eligible for deduction u/s 80C?

The sum invested in these bonds is not eligible for any deduction under section 80C, 80CCF or 54EC. The interest on these bonds is tax free. Thus no income tax would be required to be paid, nor will it be subject to TDS. However, capital gains on these bonds are taxable.

Thus, if the bonds are sold within one year of the date of purchase, the short term capital gains arising would be subject to tax at slab rates. For sale after a holding period of one year, the long term capital gains will be taxable at 10% without any indexation benefit.
Can a minor apply to these bonds?

Yes, a minor can apply for these bonds, but only through a guardian.
Can one apply in joint names?

Yes, one may apply in a joint name (not exceeding 3). However, the demat account will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account. Moreover, all payments will be made out in favour of the first applicant as well as all communications will be addressed to the first named applicant whose name appears in the application form and at the address mentioned therein.
My demat account is in joint name, but I want to apply is a single name?

In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.
Can NRIs invest in these bonds?

Yes. NRIs are eligible to invest in these bonds provided pre-specified conditions are satisfied.
Is there any preset allotment quota for Category IV investors?

Yes. Of total issue, 40% is reserved for category IV applicants. However, within these limits, the bonds will be allotted on first come first serve basis.
In whose favour the cheque is to be made?

Resident Applicants should draw Cheques / Demand Drafts in favour of "National Housing Bank Tax-Free Bonds 2013-2014 Escrow Account".

PersonalFN View:

PersonalFN is of the view that NHB tax free bonds provide a good investment opportunity as the rates offered are quite attractive. Moreover, there's no restriction on a bondholder to hold bonds mandatorily for a particular period of time. Investors may sell or buy these bonds anytime on the exchange, provided that in such a case they are held in a dematerialized mode. Hence investors need not worry much about liquidity in case of immediate need for funds.

The ticket size has been purposefully kept lower for greater retail participation and thus it is well within the reach of retail investors. Further, the quota of 40% reserved for retail investors enhances the chances of getting allotment. Special rates are being offered to category IV investors. For a person who falls in the maximum tax bracket (and category IV), effective yield (i.e. after factoring in for tax benefits) comes at around 12.3%, 12.9% and 12.9% on bonds with maturity profile of 10 years, 15 years and 20 years respectively.

NHB tax free bonds are an attractive offering considering the rating profile of the issue and competitive yield (compared to post tax yield on other fixed income instruments) for those in the maximum tax bracket. Considering the present interest rate scenario, it would be prudent to invest in the bond option with a maturity profile of 10 years. However investors, who have a longer investment horizon and seek a higher interest rate, may consider investing in bond options with maturity profile of 15 years or 20 years depending upon their liquidity requirements.

In case you wish to invest in the above instrument, you can email us at info@personalfn.com or contact us on 022-6136 1200