NTPC Launches Tax Free Bonds for 2015 – Is this for you?

After a break of one year the popular Tax-Free Bonds are back with a bang. NTPC has launched 2015’s first tax free bonds that aims to raise Rs 700 crore for its renewable energy plans. The bonds will be open for subscription from 23 Sept to 30 Sept 2015 and will have three tenures 10, 15 and 20 years.

Of the Rs 700 crore to be raised, 40% or Rs 280 crore has been reserved for the retail investors who can invest upto Rs 10 lacs, and the rest is reserved for the HNIs, corporate and QIBs.

Issue Highlights:

 Issuer NTPC Limited
Instrument Tax Free Secured Redeemable Non-Convertible Bonds
Issue Date 23rd Sept till 25th Sept 2015
Issue Size Rs 400 Crores with an option to retain over-subscription upto Rs 300 crores aggregating to a total of up to Rs 700 Crores. Available on first come first serve basis
Minimum Application Size Rs 5,000  (5 Bonds) individually or collectively, across all Series of Bonds. In multiples of Rs 1,000 (1 bond) thereafter
Yield
(R – Retail & O -Others)
10-year bond: 7.36% (R) & 7.11% (O); 15-year bond: 7.53% (R) & 7.28% (O) and 20-year bond: 7.62% (R) & 7.37% (O) 
Liquidity Traded on stock exchanges, however bond prices are subject to change
Risk Profile Low risk
Credit Rating “AAA/Stable” from ICRA and ‘AAA’ from CRISIL and CARE
Payment Details Resident Applicants: “NTPC Bonds 2015 Escrow Account”; NRIs applying on a non-repatriation basis: “NTPC Bonds 2015 Escrow Account NRI”
Issuance  In dematerialised form only

Who can apply?

  1. Retail investors (40% of overall issue): Resident individual investors; NRIs applying on a non-repatriation basis only; and HUFs applying in the name of karta investing an amount aggregating up to and including Rs 10 lacs across all series of bonds in the issue
  2. HNI investors (25% of overall issue): Resident individual investors; NRIs applying on a non-repatriation basis only; and HUFs applying in the name of karta investing an amount aggregating more than Rs 10 lacs across all series of bonds in the issue
  3. Corporate (25% of overall issue):  Companies falling within the meaning of Section 2(20) of the Companies Act 2013; limited liability partnerships, statutory corporations, trusts, partnership firms in the name of their respective partners, associations of persons, regional rural banks, co-operative banks, societies registered under the applicable laws in India and other legal entities constituted and/or registered under applicable laws in India, that are authorized to invest in bonds by their respective constitutional and/or charter documents, subject to compliance with respective applicable laws.
  4. Qualified institutional buyers (QIBs) (10% of overall issue) 

Are tax-free bonds for you?

These tax-free bonds are a very good investment option for risk averse investors and work best for investors who fall in the high income tax bracket. The current rates on a 3 year bank deposit is about 7.75%, so with someone falling in the 30.9% tax bracket the effective yield is 5.35%. While if the same investor invests in tax free bonds they get a return of 7.62% on a 20-year bond or 7.35% on 10-year bond.

With inflation easing out the interest rates are going to come down sooner or later and locking-in your money at such lucrative rates makes sense. Moreover if the rates rates do come down, which is highly likely, then you can expect ~10% appreciation in the market price of these bonds. But the short term appreciation should alone not be the reason for investing in these bonds as the prices may or may not go up and also while the bonds are listed on stock exchanges, liquidity is often an issue with such bonds.

If you are looking for regular interest payments or want to lock-in attractive yield for the long term then these tax free bonds offer very good investment opportunity.

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