Rural Electrification Corporation Limited (REC), a "Navratna" Central Public Sector Enterprise under Ministry of Power has announced an issue of 'Tax Free Bonds'. The issue size of the bond is Rs. 1,000 Crore with right to retain oversubscription up to Rs 4,500 crore (Shelf Limit). The issue opens on December 03, 2012 and is available for application till December 10, 2012.

Company Overview

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.

Business and Financial Analysis

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.
 

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

Issuer	Rural Electrification Corporation (REC) Ltd.
Offering	Public Issue by REC Ltd. of tax free bonds of face value of Rs 1,000 each, in the nature of secured, redeemable, non-convertible bonds in the nature of debentures, having benefits under section 10(15)(iv)(h) of the Income Tax Act, 1961 as amended ("Bonds") for an amount aggregating upto the Shelf Limit (Rs 4,500 crore) by way of issuance of Bonds in one or more tranches in the Fiscal 2013 (each a "Tranche Issue", and together all Tranche Issues upto the Shelf Limit, "Issue").
Rating	'CRISIL AAA'/Stable by CRISIL, 'ICRA AAA' by ICRA, "CARE AAA" by CARE & "IND AAA" by IRRPL (formerly Fitch Ratings India Private Limited)
Security	The Bonds issued by the Company will be secured by way of first pari passu charge on the identified immovable property(ies) of the Company and first pari passu charge on the book debts of the Company, other than those that are exclusively charged/earmarked to ITSL and/or any other lender(s) of the Company, as may be agreed between the Company and the Debenture Trustee, pursuant to the terms of the Debenture Trust Deed with a minimum security cover of one time of the face value of Bonds outstanding at all times. The Security shall be created within 12 Working Days from this respective Tranche Issue Closing Date. Further details pertaining to the Security are more particularly specified in the Bond Trust Deed.
Face Value	Rs 1,000 per bond
Issue Price	At par (Rs 1,000 per bond)
Minimum Subscription	5 bonds and in multiples of 1 bonds thereafter
Tenure	Bond Series 1:10 years Bond Series 2:15 years
Coupon rate	Bond Series 1: 7.22% p.a. for category I, II and category III investors and 7.72% for Category IV investors Bond Series 2: 7.38% p.a. for category I, II and category III investors and 7.88% for Category IV investors Bond Series 2: 7.38% p.a. for category I, II and category III investors and 7.88% for Category IV investors
Interest Payment	December 1st of every year and on redemption date of the respective bond series
Trustee	SBICAP Company Ltd.
Listing	BSE & NSE; NSE shall be the Designated Stock Exchange for the Issue. The Bonds are proposed to be listed within 12 Working Days from the Issue Closing Date.
Depository	National Securities Depository Limited and Central Depository Services Limited
Registrars	Karvy Computershare Private Limited
Issuance	In dematerialized as well as in physical form
Issue Open Date	December 3, 2012
Issue Close Date	December 10, 2012
Deemed Date of Allotment	The date on which the Board of Directors or Bond Committee approves the Allotment of the Bonds under Tranche-1 Issue or such date as may be determined by the Board of Directors or Bond Committee and notified to the stock exchange. All benefits relating to the Bonds including interest on Bonds shall be available to the investors from the Deemed Date of Allotment. The actual allotment of Bonds may take place on a date other than the Deemed Date of Allotment.
Eligible Investors
Category I	Public inancial Institutions as defined in section 4A of the ompanies Act; Scheduled Commercial Banks; Multilateral and Bilateral Development Financial Institutions; State Industrial Development Corporations; Insurance Companies registered with the Insurance Regulatory and Development Authority; Provident Funds with minimum corpus of ` 25 crore; Pension Funds with minimum corpus of ` 25 crore; National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the Government of India published in the Gazette of India; Insurance Funds set up and managed by army, navy or air force of the Union of India; Insurance Funds set up and managed by the Department of Posts, India.
Category II	Companies and Bodies Corporate registered under the applicable laws in India, and authorised to invest in the Bonds.
Category III	Investors applying for an amount aggregating to more than 10 lacs lakhs across all Series in Tranche-1 issue Resident Indian individuals; Hindu Undivided Families through the Karta.
Category IV	Investors applying for an amount aggregating upto and including Rs 10 lacs lakhs across all Series in Tranche-1 issue Resident Indian individuals; Hindu Undivided Families through the Karta.

Note: PAN card is mandatory for subscribing to these Bonds. A self-attested copy shall be enclosed along with the application form.   Highlights of the issue for the investors belonging to Category IV

	Series I	Series II
Minimum Application / Face Value	Rs 5,000	Rs 5,000
In Multiples of	Rs 1,000	Rs 1,000
Tenor	10 years	15 years
Interest Payment	Yearly	Yearly
Interest on Application Money	5.0% p.a.	5.0% p.a.
Coupon Payment Date	Every year on December 1 and on respective maturity	Every year on December 1 and on respective maturity
Coupon	7.72% per annum#	7.88% per annum#
Yield on Redemption	7.72%	7.88%

(Source: Prospectus registered with SEBI. & PersonalFN Research)
#(Note: Category IV investors are eligible to get 0.5% in addition to the applicable coupon rates for category I, II & III .)  

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 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 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.
   
• 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?
  
  No. NRIs are not eligible to invest in these bonds.
   
• Is there any preset allotment quota for Category III and Category IV investors?
  
  The 15% of the total issued size is reserved for applicants belonging to category III i.e. Category of HNIs and 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?
  
  Cheques/Drafts have to be drawn in favour of 'REC Tax Free Bond 2012-13 Escrow Account – Tranche I'.
   

OUR VIEW:

In our opinion REC tax free bond provides an excellent investment opportunity as the rates offered are quite decent. 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 exchanges. Hence investors need not worry much about liquidity in case of immediate need for funds.

Central government holds about 66.8% of REC's total outstanding shares which shores up the confidence in the company. Thrust on Rural electrification in coming years, through various government initiatives, will ensure the healthy growth in loan book of the company. However, one needs to keep an eye on the deteriorating health of state electricity boards, the largest borrowers of REC. Though NPA ratio is still low, it has climbed in last few quarters. 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. For category IV investors, i.e. 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. For a person who falls in the maximum tax bracket, gross yield comes at around 11.2% and 11.4% on bonds with maturity profile of 10 years and 15 years respectively.

We believe that REC tax free bond is 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.


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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