The ₹700-crore tax-free bond issue of power sector financier Rural Electrification Corporation (REC), opening on October 27 , is the third to hit the market this year after the successful issues of NTPC and PFC. Forty per cent of the bond issue is reserved for retail investors (those who invest up to ₹10 lakh).

The issue closes on November 4 but could be wrapped up earlier if fully subscribed. The bonds will be allotted on first-come-first-served basis; the minimum investment is ₹5,000 (five bonds of ₹1,000 each).

The rates offered by REC are lower than those that were offered by NTPC and PFC. That’s because the Government security (G-sec) yield to which the rates of the tax-free bond issues are linked has moved downwards after the RBI cut the repo rate last month. REC is offering retail investors 7.14 per cent annually on the 10-year bonds, 7.34 per cent on the 15-year bonds and 7.43 per cent on the 20-year bonds. Other investors will get 0.25 percentage points less across tenures. The interest will be paid out annually and is exempt from tax.

Despite lower rates than earlier issues, investors in the higher tax slabs seeking safe, long-term options can subscribe to the REC bonds. They offer the highest safety with ‘AAA’ rating. Also, they score over bank deposits that at best give 6 per cent post-tax returns for investors in the 30 per cent tax slab and 7 per cent for investors in the 20 per cent tax bracket. Investors in the 10 per cent slab though can skip the REC bond issue since bank deposits could give better post-tax returns.

Related Topics
comment COMMENT NOW