Hudco second tranche bonds open, should you invest?

Housing and Urban Development Corp (Hudco) opens its issue of tax-free bonds from 21 February-15 March. The company proposes to raise Rs 5000 crore through the issue with an option to retain oversubscription of up to the residual shelf limit.

The Tranche I of the issue had come out in January.

[caption id=“attachment_633305” align=“alignleft” width=“380”]  This bond comes with a face value of Rs 1,000. Moneycontrol.com[/caption]

Features: This bond comes with a face value of Rs 1,000. It is a secure, redeemable, non-convertible debenture. You get two options that is tranche-2 series-1 bonds with a tenor of 10 years and tranche-2 series-2 bonds with a tenor of 15 years. The frequency of interest payment is annual while the minimum application size is of five bonds.

While the coupon rate for tranche-2 series-1 bond is in the range of 7.03 percent to 7.53 percent while tranche-2 series-2 bond the rate is in the range of 7.19 percent to 7.69 percent. As a retail investor, you will get an extra 50 basis points (bps). It does not come with a put and call option. The trading lot is of 1 bond and as much as 40 percent of the issue is reserved for retail investor.

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Rating: CARE has assigned a rating of ‘CARE AA+’ and IRRPL ‘IND AA+’ to the bonds.

Finer details: You can apply for tranche-2 bond in either physical or dematerialised form. The bond is to be listed on the National Stock Exchange (NSE). There is a ceiling on coupon rates based on the reference government securities (G-Sec) rates. Interest earned from the bond does not form a part of total income, and hence it is a tax-free bond.

However, when you sell the bond on the exchange, you will have to pay capital gains tax. Sell the bond after 12 months, the capital gain will be calculated as per 10 percent without indexation. One important thing to keep in mind is that if you are not the original allottee of the bond and get transferred/ bought it later in the secondary market, you will get a coupon rate lowered by 50 bps than the applicable coupon rate for the retail investor.

What you should do: The January issue of Hudco tax-free bonds of tranche-1 series-1 bonds had coupon rate in the range of 7.34 percent to 7.84 percent while tranche-1 series-2 bond the rate was available in the range of 7.51 percent to 8.01 percent. The issue which opens tomorrow has lower rates and in the range of 7.03 percent to 7.53 percent. For tranche-2 series-2 bond, the rate is in the range of 7.19 percent to 7.69 percent. However, if, as rumoured, the government discontinues tax-free bonds in the coming Budget, the prices of such bonds may go up. Also, in a scenario this may be your last chance to to get such bonds at these rates.

The annual interest with these bonds is better than the post-tax returns you would have earned on fixed deposits, which is 6.2-6.6 percent. That’s what you earn in a one year FD post tax, in today’s market. Keep in mind Hudco bonds are available in two tenors of 10 and 15 years and hence come with a long-term lock in period. Of course, you will be able to trade these bonds on the NSE. But, getting a buyer for the bonds may turn out to be difficult as it depends on the market conditions then.

To invest in these bonds or not is your call.