Monday, October 14, 2013

Power Finance Corporation - Tax Free Bonds - October 2013

Power Finance Corporation (PFC), a PSU Navaratna company has come out with a tax free NCD Issue for Rs 750 crores in October 13 (with a green shoe option up to Rs 3876 crores). The PFC Issue has attractive yields over tenures of 10 years, 15 years and 20 years and is very relevant for those in the 20% and 30% tax brackets.  NRIs can also apply for these bonds on a repatriation as well as non-repatriation basis.

Credit Rating:

These bonds have been rated “AAA” by all the three credit rating agencies which is the highest rating.  The total loan assets of PFC were Rs 160,000 crores with a Gross NPA of 0.71% and a comfortable capital adequacy ratio of 17.98% as of 31st March 2013.

Issue Opening Date
14th Oct 2013
Issue closes on
11th Nov 2013
Credit Rating
Face Value
Rs 1000
Minimum Application
Rs 5000 (minimum of 5 bonds)
Coupon - Category IV (Retail – Up to Rs 10 lakhs)
10 year - 8.43%
15 year - 8.79%
20 year - 8.92%

Advantages of this Tax free bond Issue

  • The post tax return of 8.79% (15 year duration) and 8.92% (20 year duration) is much higher than normal bank fixed deposits (between 6 to 7% at current FD deposits for those in the 30% tax bracket)
  • There are no upper limits (unlike PPF accounts where there is a limit of Rs 1 lakh investment per year) on the total investments.
  • It is ideal for investors looking to lock in returns for a large amount of money over the long term
  • No wealth tax will be levied on the investments in these bonds
  • The  bonds will be listed and traded on the BSE (but the liquidity of these bonds remains to be seen)
  • High degree of safety (AAA rating) for the bond which is also secured by a charge on the book debts of the company

   Investment Recommendation:

We recommend investing in this tax free bonds from PFC and you may either choose the 15 year or 20 year option depending on your time horizon.  It is an excellent product to add to your debt portfolio towards long term goals like retirement planning or children education.   

The important point to be noted here is that the annual interest payouts should be deployed in other avenues to grow the corpus rather than leaving the money to be spent for living expenses. It is better to move the yearly interest to PPF or debt mutual funds or equity mutual funds as per the investor’s risk appetite.

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