Should you invest in REC Zero Coupon Bonds?
Nov 24, 2010

Author: PersonalFN Content & Research Team

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, a listed Public Sector Enterprise of the Government of India has a net worth of 11,080 crores as on March 31, 2010. Its main objective 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.

REC has announced the issue of ‘Zero Coupon Bonds’. The issue size of the bond is 250 crores with a green shoe option to retain oversubscription. The issue opens on November 18, 2010 and is available for application till November 30, 2010.

The other details as may be required by you are:

REC Zero Coupon Bonds

(Source: Offer Document of REC Bonds & PersonalFN Research)

Note:

In case the subscription exceeds the amount permitted by CBDT, allotment would be made on a first come first serve basis and the excess subscription would be refunded with interest at the rate of YTM finalized from the date of credit in REC account till the date of refund. In case subscription is refunded for incomplete details or for any other fault of the applicant no interest would be paid.

The yield which you will enjoy provided if one holds the bond till maturity is as under:

(Source: Offer Document of REC Bonds & PersonalFN Research)

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

What is the Tax Treatment of interest on these Bonds? Are these Bonds Tax Free?

No tax at source would be deducted by REC in terms of Section 194 A (3) of the Income Tax Act, 1961 on the income which is paid or payable. The said income will be treated as capital gains and capital gains tax, if any, will be payable by the investor directly to the Income Tax Authorities. However if you are an NRI, tax will be deducted at source as per the provisions of Section 195 of the Income Tax Act, 1961.

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 accounts 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.

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. However, tax will be deducted at source in the case of NRIs as per Section 195 of the Income Tax Act, 1961.

Is there a lock-in period while investing?

No.

In whose favour the cheque is to be made?

Cheques have to be made in the favour of “Rural Electrification Corporation Limited.” and should be crossed as “Account Payee Only”

So you may ask is it worth investing?

Strengths of REC

The stability of REC Ltd. continues to be strong due to the support received from its parent, the Government of India (GoI). REC constitutes a crucial part in providing finance for rural electrification. For H1 of FY 11, the company’s total assets (net of current liabilities and including DTA) stood at 72,714 crore, with a net worth of 12,286 crore. The firms operating profits (after tax) for H1 FY11 too have increased by 24.7% (to 1,205 crore) from its earlier H1 FY10 figure of 966 crore.

It’s (REC) net interest margins and the interest rate risks and foreign exchange risks is safeguarded due to GoI ownership.

OUR VIEW :

In our opinion the bond offering is quite stable but to invest in the REC Bonds, one has to shell out a minimum of 67,89,000 (500 bonds x 13,578). Thus, the bond issue commands a huge ticket size. Moreover, the bond proceeds on maturity are subject to capital gains tax in the hands of the investors. Therefore we recommend investors to give REC bonds a miss instead invest a part of their investible funds into infrastructure bonds (providing higher yields) and another part in a tax free bank fixed deposit where the tenure of holding is much less (i.e. 5 years).