tax free bond issue february 2012. rec is a navratna central public sector enterprise under ministry...

RURAL ELECTRIFICATION CORPORATION LIMITEDTax Free Bond Issue

February 2012

MARCH 2012 ISSUE

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Rural Electrification Corporation LimitedREC is a Navratna Central Public Sector

Enterprise under Ministry of Power. It is incorporated under the Companies Act, 1956, is listed and has a net worth of Rs. 12,789 Crore as on 31.03.11. Its main objective is to finance and promote rural electrification projects all over the country. It provides financial assistance to State Electricity Boards, State Government Departments and Rural Electric Cooperatives for rural electrification projects as are sponsored by them. The company disbursed Rs. 28,517 Crores and had a total income of Rs. 8,495 Crores in FY 2011. The company had a PAT of Rs. 2,570 Crores in FY 2011.

About the company

Consistently rated as 'Excellent'- the highest category - by Govt. of India since 1993-94.

Received 'MOU' Award from the Government of India five times, for 'Excellence in performance'

Cumulative sanctions & disbursements stand at Rs. 2,60,000 Cr.& 1,30,000 Cr. respectively.

Received 'MOU' Award from the Government of India five times, for 'Excellence in performance'

Achievements

To promote and finance projects in power generation, distribution promotion of decentralized and non-conventional energy sources

Implementation of Rajiv Gandhi Gramin Vidyutikaran Yojana

To expand and diversify into other related areas and activities like financing of decentralized power generation projects, use of new and renewable energy sources, consultancy services etc.

To mobilize funds from various sources To assist loanees by providing technical

guidance, consultancy services and training facilities

Objectives

Tax free Bonds“Section 10 . INCOMES NOT INCLUDED IN TOTAL INCOME.

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included – 15 (iv) Interest payable - … …(h) By any public sector company in respect of such bonds or debentures and subject to such conditions, including the condition that the holder of such bonds or debentures registers his name and the holding with that company, as the Central Government may, by notification in the Official Gazette, specify in this behalf”

* For exact details, please refer Shelf prospectus dated February 21, 2012 for REC and Tranche Prospectus, filed with the stock exchange(s) from time to time.

Relevant Extracts of Section 10(15)(iv)(h) of Income Tax Act,1961:

The Interest income on the bonds is tax free

No cap on amount of investment eligible for tax benefits

No lock-in period* Bonds will be listed on NSE and BSE

Advantages The interest income on the bonds is not

taxable/exempt. Tenure: Choice of 10 years and 15

years Proposed to be listed on NSE and BSE No lock-in period * Secured issue In demat form only PAN is Mandatory

Features

Private Placement Public Issue

IRFC (November 2011)

NHAI (December 2011)

PFC(December 2011)

Tenor 10 years 15 years 10 years 15 years 10 years 15 years

Post Tax Coupon 7.55% 7.77% 8.20% 8.30% 8.20% 8.30%

Pre tax yields

(Individuals) Tax @30.9% 10.93% 11.24% 11.87% 12.01% 11.87% 12.01%

(Corporates) Tax @ 32.45% 11.18% 11.50% 12.14% 12.29% 12.14% 12.29%

Effective yield on tax free bonds is higher than other tax free instruments. Indicative rate of return of the recent issues in FY2011-12 are given in the table below:

The Public issue of NHAI and PFC Opened in the last week of December 2011 and received huge response from institutional investors, Corporate, HNIs and NRIs.Both the issues were oversubscribed on the first day itself.

* G Sec yields as on 21st February 2011, if the issue opens in March, the reference rate of 29th March 2012 will be taken.** The effective yield considers surcharge and cess, as applicable Note: The above rates are mere illustration and the actual coupon shall be decided at the time of opening of the Issue.

COUPON AND PRE TAX YIELDS

RECENT ISSUES OF SIMILAR BONDS

• Current 10 year G-Sec Yield*: 8.19 % semi annual or 8.35 % annual• Therefore, the coupon at an upper cap arrive to

• 7.85 % for Public Issue• The interest on these bonds are tax free, and offers an effective yield** of

• Individuals and HUF: Up to 11.36 % p.a.

• Up to 11.62 % - for a domestic corporate entitiesPlease note however the rates above are caps and the company may fix the rates lower than the cap shown above

Tax bracket Assumed Coupon Rate Effective Yield10% 7.85% 8.75%20% 7.85% 9.89%30% 7.85% 11.36%

Scheme TenorAnnual

Interest Post tax return* Features/Liquidity Tax Breaks

Fixed Deposits-AAA rated banks

5 years 9.25% 6.39%Withdrawal before maturity is allowed at a charge

No Tax benefit, TDS deductible

PPF 15 years 8.60% 8.60%Maximum permissible Rs 100,000 withdrawal permitted from 6th financial year.

Section 80C benefit for deposits, interest tax free

National Saving Certificate

10 years 8.89% 6.14% No Maximum limit of investmentSec 80C benefit, NO TDS

Senior Citizen's Saving Scheme

5 years 9.00% 6.22%5 year tenure, minimum age 55, also available with public sector banks

Section 80C benefit for deposits, interest taxable

Post Office Time Deposit Account

5 years 8.56% 5.92%5 year tenure, maximum no limit. Can be closed after 1 year at a discount and withdraw tax benefit


Fixed Deposits - National Housing Bank

5 years 9.58% 6.62%Withdrawal before maturity is allowed at a charge


*Post tax return at tax bracket of 30%. The effect of Section 80C deduction is not taken in calculation of post tax returns.** Data represent category average picked up from valueresearchonline.comThe above data has been extracted on 21st February 2012 from respective websites of the issuers and other information available in news.

Mutual Fund Schemes**Last 1 year

returnsLast 3 year

returns

Tax rates

Capital Gains Dividends

Equity-Large Cap

Open Ended

0.63% 25.07% Short term: 15.45%Long term: Tax free

For individuals: NilFor Corporate Nil

Fixed Maturity Plans

Open Ended

9.14% 6.97%Short term: Tax bracket

Long term:10.30% (without indexation)

20.60% (with indexation)

For individuals: 13.52%For Corporate: 32.45%

Closed Ended

9.52% -

Debt: Gilt Medium & Long Term

Open Ended

8.13% 4.65%

Retail Benchmarks

Who can apply?Qualified Institutional Buyers (“QIBs”) as listed out below:

• Mutual Fund,• Public Financial Institution as defined in section 4A of the Companies Act, 1956;• Scheduled Commercial Bank;• Multilateral and Bilateral Development Financial Institution;• State Industrial Development Corporation;• Insurance Company registered with the Insurance Regulatory and Development Authority;• Provident Fund with minimum corpus of twenty five crore rupees;• Pension Fund with minimum corpus of twenty five crore rupees;• National Investment Fund set up by resolution no. F. No. 2/3/2005- DDII dated November 23, 2005 of the Government of India published in the Gazette of India;• Insurance Funds set up and managed by army, navy or air force of the Union of India• Insurance Funds set up and managed by the Department of Posts, India

Category I - QIB

The following investors applying for an amount aggregating to above Rs. 1 lakh across all Series in the Issue:• Resident Indian individuals;• Hindu Undivided Families through the Karta;

Category II

The following investors applying for an amount aggregating to up to and including Rs. 1 lakh across all Series in the Issue:

• Resident Indian individuals;• Hindu Undivided Families through the Karta

Category III

• Regional Rural Banks and Co-operative Banks, eligible to invest in the Issue;

• Companies; bodies corporate and societies registered under the applicable laws in India and authorised to invest in the Bonds;

• Public/private charitable/religious trusts which are authorised to invest in the Bonds;

• Scientific and/or industrial research organisations, which are authorised to invest in the Bonds;

• Partnership firms in the name of the partners;• Limited liability partnerships formed and registered

under the provisions of the Limited Liability Partnership Act, 2008 (No. 6 of 2009)

Category I

Terms of the Issue*Issuer Rural Electrification Corporation

Credit Rating‘CRISIL AAA (Stable)’ by CRISIL Limited ‘CARE AAA’ by CARE‘ICRA AAA’ by ICRA ‘Fitch AAA (ind)’ by FITCH

Instrument Tax free Secured Redeemable Non-convertible Bonds

Face value of each bond Rs. 1,000

Minimum application 5 bonds or Rs. 5,000

Trading Proposed BSE, Trading only in Demat Form

Lock in period Nil

TaxabilityInterest –Tax free; Short term/long term Capital Gains on transfer – Taxed at applicable rates as per Shelf Prospectus dated February 21st 2012

Tenor 10 years and/or 15 years

Coupon To be decided

Interest on application money

To be decided

Basis of Allotment

For each of the categories, full allotment of Bonds to the applicants on a first-come first-serve basis up to the date falling 1 (one) day prior to the date of oversubscription in that category and proportionate allotment of Bonds to the applicants on the date of oversubscription in that category.

Mode of Allotment Demat (NSDL and CDSL)

Documents Required (For Individuals and corporate)

Details of Depositary and beneficiary account of applicant.

MOA, AOA and Power of Attorney or relevant resolution or authority in case of companies, corporate bodies, registered societies, MFs, Insurance Companies etc.

*Based on Information given in Shelf prospectus dated February 21st, 2012 and tranche prospectus filed with the exchange from time to time.