Rural development is an essential part of India's growth story and rural electrification is considered to be one of the basic components in accelerating rural development. In accordance with provisions of Electricity Act, 2003, the central government notified the rural electrification policy in August 2006. The policy emphases on Providing access to electricity to all households for which grid connectivity, appropriate development and augmentation of sub-transmission and transmission system at higher voltage levels has been considered necessary.

To promote rural electrification, the government, under the Ministry of Power, has set up Rural Electrification Corporation Limited (REC) to implement the rural electrification programme. Apart from providing financial support by way of loans to projects of rural electrification, REC plays a major role in coordinating the rural electrification programme with the State Governments, State Utilities and other concerned agencies for effective implementation of schemes.

REC was incorporated on July 25, 1969 under the Companies Act 1956. REC is a listed Public Sector Enterprise of the Government of India and has assets worth Rs 1,15,596 crore under its management as on second quarter of FY 13 ended on September 30, 2012.

REC has planned to raise Rs 100 crore by issuing Tranche II tax free bonds. The company intends to utilise the money raised through the Issue of bonds towards general lending operations of the Company and other associated business objectives and to discharge existing debt obligations which were generally undertaken for business operations.

Business Profile

The main objective of REC is to finance and promote rural electrification projects all over the country. It provides financial assistance to State Electricity Boards, State Government Departments and Rural Electric Cooperatives for rural electrification projects as are sponsored by them. As per the company data, outstanding loan amount on the last day of H1 FY 13 was Rs 1,11,965 crore of which approximately 83% of the loans have been given to the state governments. The proportion of Non-performing Assets (NPA) is 0.38% of the total loans outstanding for H1 FY13. The net interest rate spread of the company has been healthy 4.65% for H1 FY 13. The company has a networth of Rs 16,576 crore. REC has a healthy business model. Approximately 1/5 of its borrowings come at a very concessional rate. This gives it an upper hand in securing its profit margins.
 

Highlight of the Issue

Issuer	Rural Electrification Corporation
Issue Size	Rs 100 Crore and has a right to retain oversubscription upto the residual shelf limit. The company has a shelf limit of Rs 5000 crore which can be exhausted in fiscal year 2012-13 by way of issuance of bonds in one or more tranches. Out of the allocated limit of Rs. 5,000 crore; the company has already exhausted the limit of nearly Rs 2,482 crore.
Nature of the issue	Public issue of Tax Free, Secured, Redeemable, Non Convertible Bonds of Face Value of Rs 1,000 each.
Credit Rating	"CRISIL AAA/Stable" by CRISIL, "CARE AAA" by CARE and "IND AAA" by IRRPL
Issue Opens	February 25, 2013
Issue Closes	March 15, 2013
Issue Price	Rs 1,000 each bond
Tenure	Tranche II-Series 1- 10 Year, Series 2-15 years
Coupon rate	Tranche II-Series 1- 6.88% p.a.; Series 2- 7.04% p.a.
Additional Rate	0.50% shall be paid to original Allottees of category IV *
Interest Payment	December 01 every year
Min. Application	5 Bonds (Rs 5,000) and in multiples of 1 bond thereafter
Mode of Holding	Physical and Dematerialised Both
Listing	NSE and BSE. The bonds would be listed within 12 working days from the date of closure
Depositories	NSDL and CDSL
Debenture Trustee	SBICAP Trustee Company Limited
Registrar	Karvy Computershare Private Limited
Quota	40% for category Iv investors *
	* Category IV Investors: Resident Indian individuals and Hindu Undivided Families who apply for Bonds aggregating upto and including Rs 10 lac across all Series of Bonds in Tranche-II

(Source: Issue Prospectus, PersonalFN Research)  

OUR VIEW:

The yields offered to category IV investors will be comparable to gross (i.e. pre-tax) yields of bonds with tenure of 10 and 15 years paying interest at 10.7% and 10.9% respectively. 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 which enhances the chance of getting allotment. For category IV investors, i.e. for those who invest less than or equal to Rs 10,00,000, incentive of 0.5% is being offered over and above the coupon rate. Considering the highest credit rating and competitive yields, we believe REC tax free bonds offer a good investment opportunity to investors falling in 30% tax slab.

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

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