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Informist, Monday, Sept. 30, 2024

By Ashna Mariam George and Sachi Pandey

MUMBAI – Yields on corporate bonds in the secondary market ended steady on Monday as investors flocked to the primary market where REC sought bids for its zero-coupon bond issue, dealers said. REC raised INR 50 billion through its zero-coupon bond maturing on Nov. 3, 2034, at a yield of 6.2483%. The issue, priced at INR 54.25, was fully subscribed.

"There was an overwhelming demand for REC, it was oversubscribed by almost 10 times. This is very good for investors where they get the tax advantage, and especially for the issuers, this is a wonderful level for 10-year paper - borrowing at 6.25%, which is much lower than the normal (government) security yield," a senior officer at a large-sized brokerage firm said.  

The yield on REC's paper was over 60 basis points lower than that of a 10-year government security. The issue garnered major demand from long-term investors, ultra-high net worth individuals and large corporates, dealers said.

Zero-coupon bonds or non-interest-bearing bonds sell at a discount and they do not offer any interest. The return on these bonds comes to investors through capital gains when they are redeemed at face value. "The demand was mostly due to taxation because LTCG (long-term capital gains) is applicable over here rather than the marginal tax rate or company income tax rate," a fund manager at a mid-sized mutual fund house said. 

The long-term capital gains tax was revised to 12.5% in the Budget for 2024-25 (Apr-Mar). Previously, the long-term capital gains tax on these assets was 20% but had indexation benefits, which adjusted for inflation. 
 

According to market participants, other public sector entities may also explore this type of bond offering after seeing the response to REC's issuance. Several banks and non-banking financial institutions are also in line to tap the bond market to raise funds in the coming days. 

The secondary market activity, however, remained dull with yields ending steady. "People are mostly in a wait-and-watch mode, and we will come to know more (about the market expectation) in the next two to three days," a fund manager of fixed income at a large-sized pension fund house said.

In the secondary market, mutual funds were active on both the buying and selling sides, dealing in shorter-tenure papers. Though banks sold shorter-tenure papers, the activity was limited as it was the last day of quarter-end, market participants said. 

Papers issued by Power Finance Corp, REC, Small Industries Development Bank of India, State Bank of India, L&T Finance, HDFC Bank, Bajaj Finance, and Tata Capital Financial Services were traded the most on the exchanges on Monday.

On Monday, deals aggregating to only INR 97.69 billion were recorded on the National Stock Exchange and BSE combined, compared with INR 124.38 billion on Friday. 

UDAY BONDS

In the secondary market, Ujwal DISCOM Assurance Yojana bonds aggregating to INR 15.90 million were traded at a weighted average yield of 7.1005-7.2901%, data from the Reserve Bank of India's Negotiated Dealing System–Order Matching System showed.

* INR 7.50 million of Punjab's 2030 bond was traded at 7.1514%

* INR 3.90 million of Tamil Nadu's 2032 bond was traded at 7.1761%

* INR 3.00 million of Haryana's 2025 bond was traded at 7.2901%

* INR 1.50 million of Uttar Pradesh's 2031 bond was traded at 7.1005%

BENCHMARK LEVELS FOR CORPORATE BONDS: 

End

Edited by Saji George Titus

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