Huge response for REC’s zero-coupon bonds

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Government-owned public financial institution REC Ltd received a huge response to its issuance of zero coupon bonds (ZCBs), with investors placing bids aggregating ₹33,671.32 crore against the notified amount of ₹5,000 crore due to favourable tax treatment of these bonds.

A ZCB is a debt instrument that does not pay interest, but trades at a deep discount. An investor realises profit at the maturity date when the bond is redeemed for its full-face value.

REC’s ZCB issuance closed at ₹54.25, with an XIRR (extended internal rate of return) of 6.2483 per cent. It mopped up a discounted amount of ₹2,712.50 crore. The bonds will be redeemed at face value (₹100) at the end of 10-years.

The outgo for the non-banking finance company, which finances all segments of the power sector (including providing financial assistance on concession to state power utilities for rural electrification, financing generation projects and activities allied to the power sector and power-related infrastructure), will be ₹5,000 crore on maturity of the ZCBs.

“The market was expecting a pricing (XIRR) of 6.25-6.75 per cent. But it dipped below 6.25 per cent, indicating the extent of appetite for these bonds.

“While REC’s ZCBs are not entirely tax-free, they offer significant long-term capital gains benefits, making them a standout in the market,” said Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP.

Favourable tax treatment

In a rare exception, the Central Board of Direct Taxes (CBDT) allowed REC to issue ZCBs with favorable tax treatment. The gains from these bonds will be taxed as long-term capital gains at maturity, instead of being taxed as interest income annually.

Ajay Manglunia, MD & Head, Investment Grade Group, JM Financial, said: “The REC bond issue got an overwhelming response from investors, with the pricing going below 6.25 per cent….After 2016-17, there has been no issuance of a tax efficient/ tax-free instrument with such (AAA) a rating….So, corporates, large family offices and high networth individuals would have invested in a big way.”

Suresh Darak, Founder & Director, Bondbazaar, observed that the cutoff for REC’s zero-coupon bond at 6.25 per cent yield-to-maturity (YTM) vs current 10-year G-sec yield of 6.86 per cent YTM. The same is due to favorable tax treatment of these bonds

Post listing these bonds will be available to trade on the exchanges where retail investors can buy & sell these bonds seamlessly, he added”.