Close on the heels of REC’s tax-free bond issue earlier this month, Power Finance Corporation (PFC) is issuing tax-free bonds. Similar to the REC issue, retail investors can invest a maximum of Rs 10 lakh in the PFC issue and will get 0.5 per cent higher interest rate than other investors.

PFC is offering retail investors an annual rate of 7.69 per cent on the 10-year bonds and 7.86 per cent on the 15-year bonds.

This is slightly lower than the returns on the REC bonds. Retail investors in higher tax brackets who did not subscribe to the REC bonds can consider subscribing to the PFC bonds. Interest rates, which are linked to Government bond yields, are likely to be lower in future tax-free bond issues this fiscal year. So investors will be better off locking into the current rates.

Better post-tax returns

Being tax-free, the returns on the PFC bonds are higher than the post-tax return on bank deposits. The highest rate being offered on bank term deposits currently is 9.5 per cent. Compounded quarterly, this translates into an after-tax return of 7.82 per cent and 6.8 per cent for bank depositors in the higher tax slabs of 20 per cent and 30 per cent.

This is lower than what the PFC bonds offer. Besides, being a quasi-Government company, PFC bonds are fully secured and enjoy the highest credit ratings of ‘AAA’.

Subscription to the PFC tax-free bonds should be considered after investing in instruments such as public provident fund (PPF) which offer better rates — 8.8 per cent tax-free — and tax deduction up to Rs 1 lakh which enhances the effective return. But you can invest only up to Rs 1 lakh annually in PPF, interest is not paid out regularly, you cannot liquidate the investment easily, and interest rates may change every year.

In contrast, one can invest a much larger amount in the PFC tax-free bonds, interest is paid out annually at the same rate, and the bonds can be sold on the Bombay Stock Exchange on which they will be listed.

But gains made on sale of bonds will be subject to capital gains tax.

Also, once a retail investor sells or transfers bonds which have been originally allotted at issue, interest rate will fall to that applicable to other investor categories (7.19 per cent for the 10-year bond and 7.36 per cent for the 15-year bond).

Company details

PFC is India’s largest infrastructure financing company. Its loan book as on September 2012 was around Rs 1.4 lakh crore, of which 84 per cent was to the power generation sector.

The state sector accounts for a chunk (63 per cent) of the loan book. Many state electricity boards have been facing financial troubles. Yet, PFC’s consolidated profit from Rs 2,378 crore in FY-10 to Rs 3,059 crore in FY-12, an annual average of 13.4 per cent. In the first half of FY-13, PFC disbursed loans of Rs 17,555 crore, 23 per cent higher than in the previous year and its comparable profit grew 37 per cent to Rs 2,113 crore.

Its net interest margin also increased from 3.91 per cent to 4.23 per cent. But the company’s net non-performing asset ratio has increased from 0.19 per cent as on September 2011 to 0.86 per cent as on September 2012.

While there are concerns on weakening asset quality, recent reforms in the power sector are a positive.

> anand.k@thehindu.co.in

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