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Investors lap up tax-free bonds, NCDs in listless market
March, 04th 2014

There is no stopping the NCD ( non-convertible debenture) and tax-free bond juggernaut. With NCDs and bond issues offering high returns, investors have lapped them up with great zeal. Public issue of NCDs and tax-free bonds mobilised 33,842 crore so far (till February) in 2013-14, data with market regulator Sebi showed.

This is almost double the money collected through such issues in 2012-13. With a month left, mobilisation from debenture and bond issues looks set to surpass the record 35,610.7 crore achieved in 2011-12. This fiscal has already had the highest number of NCD/bond offers from institutions, with as many as 24 hitting the market.

Interestingly, for the first time in a financial year, all the NCD/bond issues this year have been fully subscribed. Several NCD/bond issues that hit the market between 2008-09 and 2012-13 had poor response from investors.

Public sector firms are offering 8.5%-9% per annum for tax-free bonds, which have a tenure ranging from 10 to 20 years. The interest earned is also tax-free. Though returns on 10-year bank fixed deposits (FDs) are also similar, their post-tax gains are much lower. The post-tax returns on bank FDs is 6.05%-6.95% and 5.9%-6.05% respectively for those in the 20% and 30% tax bracket. The yield on the benchmark 10-year government bond is hovering at around 8.8%, similar to the levels seen at the peak of the rate hike cycle.

"Retail investors and HNIs (high net-worth individuals) flocked these issues as they would get tax-free returns for a long time," says Rupesh Nagda, senior vice president and head, investment advisory and products, Alchemy Capital Management. "The credit quality of these bonds is also very good. They are like semi-sovereign bonds," he says.

"There are no adequate alternative investment opportunities," says Sumeet Vaid, founder and CEO, Ffreedom Financial Planners. "The returns (offered) are also quite attractive as we are at the top end of the interest rate curve," he says. The subscriptions though are being almost entirely driven by HNIs, say advisors.

These issues would continue to attract good interest from investors as long as the interest rates rule high, say experts.

Public sector power and infrastructure finance companies attracted most investments with the final issue size swelling to 3-5 times the base issue size. Tax-free bonds offered by Indian Railways Finance Corporation (IRFC) , Power Finance Corporation (PFC) and National Highways Authority of India (NHAI) alone collected more than a third of the mobilisation or 11,739.2 crore from investors, Sebi data showed.

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