PFC (Power Finance Corporation) is the latest company to come out with tax free bonds and the terms are exactly the same as the NHAI bond issue.The only two differences that I noticed was that the minimum subscription for the NHAI issue was Rs. 50,000 and for this issue is Rs. 10,000, and these bonds will list only on the BSE while the NHAI issue was going to list on both BSE and the NSE.
Other than that, everything appears to be the same to me.
The issue opens on Friday, December 30th 2011 and will close on January 16th 2011. It is likely that this issue gets over-subscribed quickly because the same thing happened with the NHAI issue that had similar characteristics.
If that happens then the PFC issue will close the issue before the January 16th 2011, so if you are interested in these bonds then subscribe as soon as you possibly can.
The total issue size is Rs. 4,033 crores and while that doesn’t make any difference to individual investors – I want to keep a track of the size of these issues to see how much money flows into them, so that’s the reason for mentioning it here.
Here are some of the other terms of this issue.
Tranche 1 Series I
Tranche 1 Series II
Based on the questions I saw for the NHAI issue – I think a lot of people are confusing the 80CCF infrastructure bonds with these bonds.
So, I want to clarify that these are not infrastructure bonds and they do not come under the 80CCF limit – PFC had issued infrastructure bonds earlier, but they closed for subscription on November 4th 2011. If you came here looking for the Rs. 20,000 additional limit under 80CCF then this is not the instrument for you.The Product
There are two options under which investors can apply. The first option has a tenure of 10 years, and the interest payable is 8.2% per annum. The second option has a tenure of 15 years, with a higher interest of 8.3% per annum. Interest payment will be made annually on October 15, every year. The interest income is tax free in the hands of the investor and there is no deduction of tax at source. Each bond has a face value of Rs 1,000 and one can apply for a minimum of 10 bonds. There is no put or call option in any of the bonds. The bonds will be listed on theBSE. The bonds have been rated AAA by Crisil as well as Icra, which indicates highest degree of safety in terms of servicing of financial obligations.
While 50% of the issue is reserved for institutions, 25% is reserved for HNIs and the balance 25% reserved for retail investors. Investments below and up to Rs 5 lakh will be considered as retail applications, while investments above Rs 5 lakh will be considered for allotment in the HNI category.
Why the issue scores well
PFC bonds score well for those in the highest tax bracket. So if you invest 1 lakh in PFC bonds, and you are in the highest tax bracket, you will get an interest income of Rs 8,300 per annum for 15 years which is tax free. As against this, even if you earn a 9% interest in bank fixed deposit and you are in the highest tax bracket (30.9%) you will earn an interest of Rs 9,000 per annum but will pay a tax of Rs 2,781, so the net interest you earn is only Rs 6,219, or yield of 6.22%.
Tax-free interest of 8.3% is the highest available after PPF, and there is no upper ceiling on investment. Though PPF offers you an interest of 8.6%, it is subject to revision and the maximum amount you can invest is only Rs 1 lakh per annum.
Why not to apply
Even though the bonds will be listed, one is not sure if there will be an active secondary market for these bonds. Hence, if you need the money in between, you may have no other way out.