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Saturday , November 26 , 2011
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A long haul

Earlier this month, the Housing and Urban Development Corporation (Hudco) launched its new Series C tax-free bond issue. The government-owned financial institution is essentially offering 10-year and 15-year secured non-convertible tax-free bonds, which provide investors an attractive opportunity to lock in on the high interest rates prevailing in the market.

First, the details. Hudco’s Series C issue, which closes on November 30, offers tax-free bonds of two durations: 10 years and 15 years. Each bond carries a face value of Rs 1 lakh and the minimum application size in one bond. The Rs 200-crore bond issue is rated AA+ by Fitch Ratings, which means it offers “high safety for timely servicing of debt obligations”.

The Option 1 or 10-year bond carries a tax-free interest rate of 8.09 per cent while the Option II 15-year bond offers interest at 8.16 per cent. For investors in the highest tax rate, that is 30 per cent (plus 3 per cent cess), this translates into pre-tax returns of 11.71 per cent for 10 years and 11.81 per cent for 15 years.

“This is very attractive for people in the higher tax bracket as it is a good chance to lock in on the high interest rates available currently,” says Suresh Sadagopan, founder, Ladder 7 Financial Advisories. After all, he points out that “the general consensus is that interest rates won’t remain high in the long term in a maturing economy”. “As the Indian economy matures, interest rates have to come down. So it makes sense for investors to lock in on higher returns at this point in time,” he adds.

The interest on the bonds will be paid out annually and the principal amount will be paid on redemption at the end of the bond’s tenure period. There is no option to reinvest the interest amount. Remember though, that you will be locking in your funds for a long duration. Hudco does, however, plan to list the bonds on the National Stock Exchange, which could provide liquidity.

By Aritra Dua

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