NHAI tax-free bonds soar on listing; but note the caveats

The National Highways Authority of India’s (NHAI’s) tax-free bonds got a stellar listing on the National Stock Exchange on Wednesday. After opening at Rs 1,035, the 15-year bond (N2, face value Rs 1,000) hit a high of Rs 1,043.4 and was trading at Rs 1,036 around 1pm, up 3.49 percent. The yield to maturity for the 15-year bond is 8.012 percent against a coupon rate of 8.3 percent.

Similarly, the 10-year bond (N1) also opened higher at Rs 1,030 and hit a high of Rs 1,035 and was trading at Rs 1,028.4, up2.84 percent. At the current price, the yield to maturity for the 10-year paper is 7.974 percent. This means tax-free bonds are best bought through the public offers; buying from the markets is only for the rich.

The total traded volume for the bonds had crossed Rs 400 crore on the NSE midway through the trading day.

These bonds had generated a lot of interest amongst investors - especially high net-worth individuals (HNI) and institutions - and the issue was oversubscribed 2.5 times. That is, it received a total subscription of Rs 25,200 crore compared to Rs 10,000 crore that was on offer.

Analysts attribute two reasons for the high success of the issue and its listing: interest earned is tax-free in the hands of the investor, and the fact that one can buy the bonds on the markets.

After the super success of NHAI, several other public sector companies raised - or are still raising - money from tax-free bonds. While the Power Finance Corporation and Indian Railway Finance Corporation issues have already closed, Hudco’s issue is still open for a few more days. Hudco, due to its lower rating, pays 8.22 percent to retail investors for the 10-year bond and 8.35 percent for 15 years.

A few point for investors to note are these:

- The interest is tax-free, but short-term capital gains will be taxed as usual.

- You can buy more bonds from the market, but since they are being quoted at a premium, your earnings will be lower.

- The real returns on tax-free bonds are much higher depending on your tax-bracket. In the top tax bracket, the returns are as high as 11.8-11.9 percent post-tax for various bonds.

- These tax-free bonds are not meant for investment of your capital gains. Those bonds are issued by Nabard.

- Some of the bonds have step-down features. This means if you buy from the market, you get a lower rate of interest. The seller will thus get a lower premium. IRFC and Hudco bonds are in this category. So one should expect a lower premium on them when they get listed.

- Retail investors get a higher rate than HNI or institutional investors. So apply for a maximum of Rs 5 lakh in any bond issue to retain your retail status and improve your chances of allotment.