Too many tax-free bonds spoil the game

From December through March the debt markets are normally awash with tax free bonds. The gold standard is last year's NHAI issue which raised Rs 10,000 crore, offering up to 8.3 per cent on the 15 year papers. It received bids of Rs 25,000 crore and had to refund an excess Rs 15,000 crore to the investors which was later absorbed by IRFC, Hudco and others.

Enthused by this response, the government, in Budget 2012-13 has doubled the target from Rs 30,000 crore to Rs 60,000 crore. Other than the size the problem is one of timing. Even though companies were told to stagger the issues through the year, those have got bunched. That means along with advance tax demand, disinvestment papers and demand from state governments these tax free papers have now begun arriving in the market.

REC was the first off the block with an issue of Rs 1,000 crore with a greenshoe option up to shelf limit of Rs 4,500 crore. Offering at least 7.72 per cent, the issue got subscribed only 2.04 times. The highest number of bids (96.3 lakh) came from the retail category, the QIB portion witnessed a very weak subscription at only 0.2 times.

Last Friday Power Finance Corporation entered the market with an issue of Rs 4,590 crore. It too is offering the same menu for investors but has raised only Rs 400 crore in six days. So what worked last year which is missing this time around?

Last year all the offerings at over 8 per cent stood out in terms of returns. But 7.2 per cent is far down the slope from there.

For institutional investors, there is no TDS to economise on cash outlay and the returns are the same as for G-Secs. They are attractive only for the retail investors but here too the step down clause kicks in to hurt. The coupon rate on the bond goes down 50 basis points if they sell them in the secondary market, which means liquidity comes at a steep cost.

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