State-run Housing and Urban Development Corporation (HUDCO) today said its public issue of tax-free bonds will hit the market on January 27 with a target of raising up to Rs 4,685 crore. The issue opens on January 27 and closes on February 6, 2012. The bonds, proposed to be listed on the NSE and BSE, would have tax benefits for subscribers under the Income Tax Act, 1961.

HUDCO is a public sector firm fully owned by the government for financing of housing and urban infrastructure activities in India. The funds raised through bonds would be utilised for project financing. The bonds carry a coupon rate of 8.10 per cent per annum for bonds with a maturity of 10 years and 8.20 per cent per annum for bonds with a 15-year tenure. The lead managers to the issue are Enam Securities and SBI Capital Markets. The Debenture Trustee to the issue is SBICAP Trustee Company Ltd.

Tax Benefits

1. The income by way of interest on these Bonds shall not form part of total income as per provisions under section 10 (15) (iv) (h) of I.T. Act, 1961;

2. There shall be no deduction of tax at source from the interest, which accrues to the bondholders;

3. As per provisions under section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 20% of capital gains calculated after reducing indexed cost of acquisition or 10% of capital gains without indexation of the cost of acquisition;

4. Wealth Tax is not levied on investment in Bond under section 2(ea) of the Wealth-tax Act, 1957.

  • Issue period: 27 January 2012 to 6 February 2012
  • Issue of Tax Free Secured Redeemable Non Convertible Bonds
  • Basis of allotment : On first-come-first-serve basis within each category
  • The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income as per provisions under section 10 (15) (iv) (h) of IT Act, 1961.
  • Issue size aggregating Rs 2,000 Crores with an option to retain an oversubscription upto to the shelf limit upto Rs 4,684 Crores

Investment Opportunity:

Interest rates are at peak level; best time to invest in fixed income tax free instruments.

Interest rate cycle has peaked out –Given the sharp slowdown in the industrial activity and softening of the food inflation, the interest rate cycle has peaked out. Reserve Bank of India has restrained from increasing the interest rates in the last policy review meet and is expected to begin reducing rates in March or April 2012. The bond yields which have increased close to 9% levels have corrected significantly and show easing of pressure on rates.

High post tax yield for AA+ rated product – Tax free bond with yield of 8.10% – 8.35% is comparable with yields offered on government bonds and offer extremely attractive pre-tax yield close to 12% for a long period of time. The bond issue has got AA+ (stable) rating from the rating agencies – Fitch and CARE. The bonds would also be listed and tradable on NSE/BSE.

Company Overview:

  • HUDCO is a techno-financial institution engaged in financing and promotion of housing and urban infrastructure projects throughout India with 41-years of experience in the housing financing market.
  • Customers across 33 states and union territories covering around 1,800 cities and towns.
  • Network of 20 regional offices and 10 development offices with zonal office in Guwahati.
  • HUDCO has As on Dec 31, 2011, the Company had provided finance for over 1.50 Crore dwelling units and over 1,600 urban infrastructure projects in India.

Terms of the Issue:

Face Value per Bond Rs 1,000
Tenor 10 years 15 years
Minimum Application Rs 10,000 (in multiples of Rs 1,000 thereafter) Rs 10,000 (in multiples of Rs 1,000 thereafter)
Interest Rate % p.a. (Category I & II) * 8.10 8.20
Interest Rate % p.a. (Category III) * 8.22 8.35
Frequency of Interest payment Annual Annual
Issuance demat form or physical form demat form or physical form
Redemption Amount Repayment of the Face Value and any interest that may have accrued on the Redemption Date

Issue Structure:

Category I Category II Category III
Upto 45% of Overall Issue Size* Upto 25% of Overall Issue Size* Upto 30% of Overall Issue Size*
QIB & Corporate Individuals & HUF applying for more than Rs. 5 Lakhs Individuals & HUF applying for upto Rs. 5 Lakhs
*on first come first serve basis to be determined on the basis of date of receipt of applications duly acknowledged by the Bankers to the Issue.

* The coupon rates of 8.22% p.a. and 8.35% p.a. shall be payable only to the original allottees under Category III for the Tranche 1 and Series I Bonds and Tranche 1 and Series II Bonds respectively. Please refer to the final prospectus for details.

* For the purpose of information only, invest only after referring to the final prospectus.

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