Saturday, May 18News That Matters

PFC Tax free Bonds 2013- Tranche II – Details & Review


In this week, there is wave of seconf tranche of Tax free bonds. PFC, HUDCO, REC, IRFC are launching second round (tranche) of tax free bonds,

Power Finance Corporation (PFC) has come out with Tranche II of the tax free bonds after having raised Rs 700 crore in Tranche I in Dec 2012.

About the Company

PFC is engaged in financing and promotion of power generation, transmission and distribution including renewable energy projects throughout the country. State electricity boards are the primary borrowers. A lot has been talked about the bad health of the SEBs. However, PFC being a government owned organisation, investors may not be too concerned about the financial health of the company even if the default from the SEBs continues.

PFC posted a net profit of Rs 1,117 crore for the third quarter of this fiscal, against Rs 1,108 crore in the same period of previous fiscal.

Company’s total income from operations rose to Rs 4,465.37 crore for three months ended December 31, 2012 from Rs 3,282.35 crore in the same period last fiscal.

The funds raised through this issue will be utilised 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.

PFC is authorised to raise the bonds aggregating to Rs 5,000 crore in fiscal 2013 out of it has raised an amount of Rs 410 crore on a private placement basis. Additionally, it also raised Rs 699.75 crore in December 2012.

Important Dates for PFC Tax free Bonds 2013

  • Issue Opens on  18-Feb-2013
  • Issue Closes on  15-Mar-2013

Interest Rates 

The tradable tax-free secured redeemable non-convertible bonds of Rs 1,000 each in two series,

For Retail investors:

Series I – 10 years – coupon rate of 7.38%  (pre tax yield upto 10.68%)
Series II – 15 years – coupon rate of 7.54%   (pre tax yield upto 10.91%)

Qualified institutional buyers (QIBs), high networth individuals (HNIs) and corporates will get 0.50% lesser than above rates.

The interest earned will be exempt from tax under section 10 (15)(iv)(h) of the Income Tax Act, 1961.

Other Important Points

  • Minimum application for subscription in retail segment is of Rs 5,000
  • Maximum investment limit for retail investors is  Rs 10 lakhs
  • Investors can choose to apply in demat as well as physical form. Demat account is not mandatory
  • NRI Investment: Non-US NRIs can also invest in this issue. They can apply for these bonds both on repatriation basis as well as non-repatriation basis.
  • The allotment will be made on a “first-come-first-served” basis.

Tax Benefits

  • Interest from these Bonds shall not be included in total income of any person as per provisions of Section 10 (15) (iv) (h) of Income Tax Act, 1961.
  • Since the interest income on these Bonds is exempt from tax, no Tax Deduction at Source is required.
  • Wealth Tax is not levied on investment in bonds under section 2(ea) of the Wealth-tax Act, 1957
  • The Bonds being listed with NSE shall be treated as a long term capital asset if they are held for more than 12 months and therefore  capital gains arising on the transfer of Bonds shall be subject to tax at the rate of 20% of capital gains calculated after reducing indexed cost of acquisition or 10% of capital gains without indexation of the cost of acquisition.

The issue is AAA rated by CRISIL & ICRA

Why invest:

  • PFC is a government owned company and the NCDs issued are secured in nature, having priority over unsecured lenders. The issue is rated AAA by Crisil and Icra. Hence, the PFC tax free bond appears attractive vis-à-vis other fixed income instruments currently available for long term fixed income investments especially for highest tax bracket investors.
  • People falling under the 30% tax bracket should invest in these bonds. On a pre-tax basis, the yield comes to about 10.86% which is quite good in current interest rate scenario.
  • All the previous 10 year tax free bonds issued last year are currently trading at 7.2 – 7.4% yield to maturity (YTM).
  • Since interest rates are going down, subsequent tax-free bond issues could be at lower rates.

Why not to invest:

  • There is a Re-investment Risk on Interest earned on all such Tax free Bonds.
  • If you sell bonds in the secondary market, subsequent investors will get interest rates which are lower by 50 basis points. So the liquidity could be low. and you should hold this till maturity.

Download the Form

You can download the Form here – from PFC Website.

Taxation Aspects of Tax FREE Bonds

Read my Post –  Taxation Aspects of Tax free Bonds?

Merits & Demerits of Tax free Bonds

Read –  Tax free Bonds – Should you invest in these?

Allotment Status of Tax free Bonds

Youc an check the Allotment status of Tax free Bonds application at link below by entering application number / PAN number:

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