Company Overview

Rural Electrification Corporation Limited (REC), a "Navratna" Central Public Sector Enterprise under Ministry of Power, was incorporated on July 25, 1969 under the Companies Act 1956. REC is a listed Public Sector Enterprise of the Government of India which has assets worth Rs 95,322 crore under its management as on 9 months of FY 12 ended at September 30th, 2011.

Business 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 audited result for first 9 months of FY 12 ended on September 30th, 2011; States and central PSUs have been the major borrowers which together account for about 88% of the total loan book outstanding. REC manages to keep the cost of borrowings lower, thanks to its ability to raise funds at the subsidised rates. Net interest rate margins (NIMs) have been healthy at 4.39%. Net Non-Performing Asset (NPA) ratio stands at 0.45% which is considered low but it has substantially increased from 0.003% recorded during the same period in FY 11. Low NPA ratio denotes the high quality of loan book.

A noteworthy point is that the company's capital adequacy ratio, which indicates the company's ability to absorb losses, stands at 17.44% as of September 30, 2011, which is higher than the minimum of 15% prescribed by RBI.

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, aggregating Rs 1,500 crore with an option to retain an oversubscription up to Rs 3,000 crore
Rating	'CRISIL AAA'/Stable by CRISIL, ' ICRA AAA' by ICRA, "CARE AAA" by CARE & Fitch AAA by FITCH
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.
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	Option I: For category I & II investors 11.60% p.a. Bond Series 1: 8.13% p.a. for category III investors and 7.93% for Category I & II investors Bond Series 2: 8.32% p.a. for category III investors and 8.12% for Category I & II investors
Interest Payment	July 1st of every year and on redemption date of the respective bond series
Trustee	IL & FS Trust Company Ltd.
Listing	BSE
Depository	National Securities Depository Limited and Central Depository Services Limited
Registrars	Karvy Computershare Private Limited
Issuance	In dematerialized form only
Issue Open Date	March 6, 2012
Issue Close Date	March 12, 2012
Deemed Date of Allotment	Deemed Date of Allotment shall be the date on which the Directors of the Company or any committee thereof approves the Allotment of the Bonds. 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	Category II	Category III
	Mutual Fund, Public Financial Institution as defined in section 4A of the Companies Act, 1956; Scheduled Commercial Bank; Multilateral and Bilateral Development Financial Institution; State Industrial Development Corporation; Insurance Company registered with the Insurance egulatory and Development Authority Provident Fund with minimum corpus of twenty five crore rupees Pension Fund with minimum corpus of twenty five crore rupees; 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 Regional Rural Banks and Co-operative Banks, eligible to invest in the Issue; Companies; bodies corporate and societies registered under the applicable laws in India and authorised to invest in the Bonds; Public/private charitable/religious trusts which are authorised to invest in the Bonds; Scientific and/or industrial research organisations, which are authorised to invest in the Bonds; Partnership firms in the name of the partners; Limited liability partnerships formed and registered under the provisions of the Limited Liability Partnership Act, 2008 (No. 6 of 2009)	Investors applying for an amount aggregating to above Rs 5 lakh across all Series   Resident Indian individuals; Hindu Undivided Families through the Karta and	Investors applying for an amount aggregating to up to and including Rs 5 lakh across all Series   Resident Indian individuals; Hindu Undivided Families through the Karta and

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 II & III

	Series-1	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	8.13%	8.32%
Coupon Payment Date	Every year on July1 and on respective maturity	Every year on July1 and on respective maturity
Coupon	8.13% per annum	8.32% per annum
Yield on Redemption	8.13%	8.32%

(Source: 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?
  
  Yes. The bonds can be allotted only in demat form.
   
• 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.
   
• If I'm an NRI can I invest in these bonds?
  
  No. NRIs are not eligible to invest in these bonds.
   
• Is there any preset allotment quota for Category II and Category III investors?
  
  Applicants belonging to category II & Category III would be allotted bonds up to 25% each of the overall issue size. However in case of any under subscription in any category the under subscribed portion would be allotted to the Category III investors at first and category II and category I investors would be given the preference in the descending order.
   
• In whose favour the cheque is to be made?
  
  Cheques/Drafts have to be made in the favour of:
  
  Account payee cheques should be be drawn in favour of "REC Tax Free Bonds- Escrow Account"
   

OUR VIEW:

In our opinion these tax free bonds provide an excellent 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.

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. Capital adequacy ratio too, is robust 17.4% (as on September 30, 2011) which adds an element of safety to the issue. 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; 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. We recommend investors to subscribe for the issue.
 

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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