IIFCL bonds Tranche III – Tax Free Bonds – Liquidity / Practicality

POSTED BY Gardner ON February 27, 2014 2:13 pm COMMENTS (3)

Hello Friends,

My questions are for “tax free bonds” – especially with view on latest IIFCL bonds Tranche – III (i.e. 3rd round of fund raising in last few months) – where its raising 2800 cr on first come first serve basis. Issue closes on 14 march 2014

I was considering to invest in these tax free bonds – IIFCL offering 8.80% tax free for 15 yr tenure (effectively, 12.37% pre tax yield – for 30% tax bracket) – and it does seem a great alternative to FD’s at about 8.50% to 9.00% which are taxable.

The only problem Ii see is the log lock-in!! But there seems to be window of liquidity; as I am told that these can get traded on NSE / BSE, if you have them in demat form (one can buy both in paper and demat form). So basically, you can sell it to someone and exit before 15 yrs tenure ends.

Now, I have few questions:

1) If someone buys in paper form (does not have demat a/c as yet), can he later convert them into Demat form – so that trading is possible?

2) Is there any lock-in period (diff from the tenure period) before which one cannot sell / trade on exchange? Or can he / she sell immediately when listing happens?

3) How soon does trading start post issue closure (I am told for IIFCL bonds, it will list in 12 days from date of closure)?

4) Will it be that there would be quick trading in initial days, and after that liquidity will dry up as only long term holders will keep holding the bonds? I am told for this reason one should stay away from smaller size bonds – but IIFCL is one of the biggest bond offers (2800 cr.). How will liquidity be in IIFCL?? Say, I wish to sell on BSE after 18 months; will I get any buyer?

5) There are different quotas for differ categories in the total fund raising of 2800 cr. Is it that the when one wants to sell on nse / bse, he can sell to only same category, further limiting the liquidity?? (retail category quota is 40%)

6) When you sell it off on NSE – say after 18 months – one would, I guess, get back the principle + capital appreciation (because if interest rates go down the yield may go higher for these bonds). . . . Q: (a) what about the interest earned until the point where its sold? (2) is that tax free interest? (c) and are the profits for capital gain taxable? (d) How and when do we get all these three – interest, profit, and principle?

phew! sry for long post. any help would be highly appreciated.

Gaurav

3 replies on this article “IIFCL bonds Tranche III – Tax Free Bonds – Liquidity / Practicality”

  1. ashalanshu says:

    Dear Gaurav, it’s my pleasure.

    Thanks

    Ashal

  2. Gardner says:

    Hello Ashal, i cant thank you enough for replying all my answers in such detail. Thanks and good day!

  3. ashalanshu says:

    Dear Gurav, I’m trying to answer your queries.

    1) If someone buys in paper form (does not have demat a/c as yet), can he later convert them into Demat form – so that trading is possible?
    Yes, you can do that.

    2) Is there any lock-in period (diff from the tenure period) before which one cannot sell / trade on exchange? Or can he / she sell immediately when listing happens?
    One may sell after listing.

    3) How soon does trading start post issue closure (I am told for IIFCL bonds, it will list in 12 days from date of closure)?
    You already got the answer. Now there is one important thing for trading. A trade involves buyer and seller. So when you are going to sell, there should be a buyer. Without a buyer, merely the listing has no meaning for you.

    4) Will it be that there would be quick trading in initial days, and after that liquidity will dry up as only long term holders will keep holding the bonds? I am told for this reason one should stay away from smaller size bonds – but IIFCL is one of the biggest bond offers (2800 cr.). How will liquidity be in IIFCL?? Say, I wish to sell on BSE after 18 months; will I get any buyer?
    Try to trade in past issues to get the clear answer.

    5) There are different quotas for differ categories in the total fund raising of 2800 cr. Is it that the when one wants to sell on nse / bse, he can sell to only same category, further limiting the liquidity?? (retail category quota is 40%)
    Post listing, all quotas are equal and anybody can sell.

    6) When you sell it off on NSE – say after 18 months – one would, I guess, get back the principle + capital appreciation (because if interest rates go down the yield may go higher for these bonds). . . . Q: (a) what about the interest earned until the point where its sold?
    You already got the interest of 1st year, after 12 months. so it’s in your pocket. Next 6 months’ interest is part of the selling price you are getting.

    (b) is that tax free interest?
    The interest earned is tax free.

    (c) and are the profits for capital gain taxable?
    Yes, capital gains are taxable. As you are selling after 18 months, which is more than 1Y, the gains if any ‘ll be LTCG and you need to pay tax either at flat 10.3% or indexed 20.6% as per your choice.

    (d) How and when do we get all these three – interest, profit, and principle?
    Interest is paid yly directly into your bank account through ECS. Profit and principal if you are selling on exchange ‘ll come from the trade. If you hold till maturity, the principal and last year’s interest ‘ll be credited into your bank account through ECS.

    Thanks

    Ashal

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