Tax free bond issues are simply not the flavour in 2012-13. Reason: lower interest rates compared with those offered in 2011-12. In such a lacklustre market, state-owned Jawaharlal Nehru Port Trust (JNPT) is hitting the market at the fag end of the financial year 2013 with its tax free bonds of Rs 1,000 each to raise Rs 2,000 crore.
Tax free bond issues are simply not the flavour in 2012-13. Reason: lower interest rates compared with those offered in 2011-12. In such a lacklustre market, state-owned Jawaharlal Nehru Port Trust (JNPT) is hitting the market at the fag end of the financial year 2013 with its tax free bonds of Rs 1,000 each to raise Rs 2,000 crore. Those securities are offering 7.32% p.a. interest rate for retail investors and 6.82% for others.
Should you at all invest?
Rates are relatively lower than the previous year issues wherein the lowest rate offered was at around 7.90%. Still, there is enough reason to invest, believe personal finance advisors.
"Interest rates are still reasonable in a falling interest rate regime," says Anil Rego, CEO and founder, Rights Horizons – a Bangalore based advisory firm.
"It is a good bet for people who are long term investors in debt instruments and fall in the highest tax brackets (30% or 20%). Compared with bank fixed deposits, these bonds are preferred due to tax benefits. Besides the tax effect, one can lock in his surplus money at a higher rate in the next ten years."
India's largest lender SBI offers 8.75% for deposits upto 10 years. A depositor who falls in 30% tax bracket, will actually get a post tax return of 6.13%. This is below fixed rates offered by JNPT tax free bonds with tenure of 10 years.
What is the USP?
Issue arrangers point out that it is the only AAA rated company in the port sector. Its sovereign backing too adds to its favour.
"JNPT is a standalone operating company unlike any other finance company," Ashish Sable, vice-president at SBI Capital Markets told moneycontrol.com on the sidelines of a conference on Friday.
"It is the largest company in the port sector with AAA rating. It has the backing of government of India. Accordingly, it is not directly vulnerable to any financial meltdown. The safety of your investment is the unique selling proposition in this bond issue," he said.
Need to hold your investment for 10 years?
Not really. The bond issue is opening on March 11 and will close on March 15. After that, those will be listed in both the stock exchanges NSE and BSE. An investor can well trade with his securities and exit from the investment.
"Unless and until one is in liquidity crisis it does not make any sense to sell those bonds in the secondary market. Interest rates would bottom out in next 2-3 years. Thereafter, nobody knows what direction interest rates will move. It is better to lock these rates for next 10 years. JNPT is offering no substandard rates," said Suresh Sadagopan, Principal planner at Ladder7 Financial, a Mumbai-based advisory firm.
In 2012-13 so far, the Reserve Bank of India slashed it key policy rate or repo – the rate at which banks borrows from the central bank, by 75 basis points. Banks too cut their lending and deposit rates to transmit policy actions. However, some banks of late, marginally increase their deposit rates in order to mop up more cheap funds.
Despite all odds, the issue still caters to an attractive investment opportunity. However, JNPT tries to play safe. In line with market trend, they kept the core issue size just at Rs 500 crore or 25% of the targeted fund raising (Rs 2,000 crore). The rest Rs 1,500 crore or 75% is earmarked for oversubscription.
If the issue fails to get full response, according to market observers, the company can conveniently call it a success as the core issue shall have been fully subscribed.
Out of total issue, retail subscription can go up to 40%. There is no put or call option. This means, neither the company can call off bonds nor investors can surrender those during investment tenure.