PFCs new offering: Tax Free Non-Convertible Bonds
Dec 30, 2011

Author: PersonalFN Content & Research Team

Company Overview

Power Finance Corporation (PFC) is one of Navratna Public Sector Undertaking (PSU) registered with the RBI as a Non-Banking Financial Company (NBFC). The company is classified as an Infrastructure Finance Company (NBFC-ND-IFC), and is incorporated with an objective to provide financial resources and encourage flow of investments to the power and associated sectors, to work as a catalyst to bring about institutional improvements in streamlining the functions of its borrowers in financial, technical and managerial areas to ensure optimum utilisation of available resources and to mobilise various resources from domestic and international sources at competitive rates.

Business Analysis

PFC provides various services and financial products like Project Term Loan, Equipment Lease Financing, Discounting of Bills, Short Term Loan, and Consultancy Services etc. for various power projects in generation, transmission, and distribution sector as well as for renovation & modernization of existing power projects to generate revenue.

Apart from funding, PFC is also entrusted the responsibility to exploit new opportunities in the area of consortium lending, lending to capital equipment manufacturers and fuel supply projects and related infrastructure development projects, renewable energy and CDM, and equity funding.

Company’s total loan assets stands at Rs 1,10,421.25 crore as on September 30, 2011 from Rs 43,902.83 crore as on March 31, 2007 clocking a growth of over 150%. Interest income, from disbursing these loans stands at Rs 5,864.95 crore as on September 30, 2011 as against Rs 4,721.21 crore as on September 30, 2010 (an increase of 24% y-o-y). However, there has been an increase in the amount of unsecured loans raised by the company. In the period from March 31, 2011 to September 30, 2011, unsecured loans have risen by 23.4% (as on March 31, 2011 unsecured loans outstanding were to the tune of Rs 73,562.77 crore). Moreover, the firm has a significant concentration of outstanding loans to certain borrowers, particularly public sector power utilities, many of which are historically loss-making, and if these loans become non-performing, the quality of the asset portfolio may be adversely affected. For instance as on September 30, 2011 the single largest borrower accounted for 8.58% (Rs 9,475.81 crore) of the total outstanding loans, while the top-5 and top-10 borrowers accounted for 31.86% (i.e. Rs 35,175.55 crore) and 53.99% (i.e. Rs 59,635.10 crore), respectively of the total outstanding loan assets worth 1, 10,421.25 crore. Similarly, the firm has granted loans to the private sector non-recourse or limited recourse basis, which increases the risk of non-recovery and may adversely affect its financial condition. As on September 30, 2011, Rs 9,619.21 crore, or 8.71%, of the total loan assets given to the private sector borrowers were outstanding.

Currently the firm also has an exposure to borrowing and lending, and are likely to do so in the near future which thus exposes them to fluctuations in foreign exchange rates and may be detrimental to their financial condition.

But a noteworthy point is that the company’s capital adequacy ratio which indicates a company’s ability to absorb losses stands at 18.22% as of September 30, 2011, which is much higher that RBI limit of 15.00%.

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

Note: PAN card is mandatory for subscribing to these Bonds. A self-attested copy shall be enclosed along with the application form.

Investors (across all categories) will also have the following options available at the time of subscribing to the issue:

(Source: Draft prospectus registered with SEBI. & PersonalFN Research)

Well, after reading the details of the tax free bonds (as provided above), there may be still 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. The bonds can be purchased and sold 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?

The bonds can be allotted either in demat or physical form. However, they can be traded on the exchange in demat mode only.
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 like normal corporate bonds.

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 and only through a guardian.
Can one apply in joint names?

Yes, one may apply in a joint name. 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.
Who will get the interest in case of joint application?

In case of joint application, interest will be accounted to the first holder only.
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.
If I’m an NRI can I invest in these bonds?

Yes, NRIs are eligible to invest in these bonds.
Whether an applicant applying in the first day of opening of the issue is assured of allotment?

The issue will remain open for at least 3 days. If the issue is over-subscribed within this period, the applicants will receive allotment on pro rata basis. Thus investors who have applied during this period will receive at least some allotment. If issue extends beyond 3 days, the applicant in first 3 days will receive full allotment.
In whose favour the cheque is to be made?

Cheques/Drafts have to be made in the favour of:

For non-NRI and non-FII applicants: "PFC Tax Free Bonds- Escrow Account"

For NRI applicants: "PFC Tax Free Bonds-NRI Escrow Account"

Moreover, crossed "A/C PAYEE ONLY" cheques should be drawn.

OUR VIEW:

In our opinion these interest tax free bonds provide an excellent investment opportunity as the rates offered are quite attractive. Moreover, there no restrictions on holding the bond for a particular period and hence investors may sell or buy these bonds anytime over the exchange (provided an investor has a demat account). Capital adequacy ratio too, is well above the stipulated 15.0% which adds to the safety of the issue. However, one needs to keep an eye on the growing amount of unsecured loans in PFCs balance sheet which may deter its ability to service its investors.

The ticket size has been purposefully kept lower for greater retail participation and thus it is well within the reach of retail investors.

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