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Home >Opinion >Online-views >Product Crack | Power Finance Corp. Ltd’s tax-free bonds

Power Finance Corp. Ltd (PFC), the state-owned non-banking financial company which lends mainly to the power sector, has come out with the first tranche of tax-free bonds. These bonds fall under section 10(15) (iv)(h) of the Income-tax Act which means the interest that investors would earn from these bonds are not taxed. Through this offering, PFC aims to raise 5,033 crore which includes a greenshoe option of 4,033 crore.

To seek participation from all classes of investors, PFC has earmarked 25% of the total issue size for retail investors, who can invest up to a maximum of 5 lakh, another 25% is reserved for high networth individuals (HNIs) and the balance 50% for institutions. Allotment would be made on first-come-first-served basis.

Features

Ratings

Crisil Ltd has assigned a rating of CRISIL AAA/stable to the long-term borrowing programme of 38,500 crore and CRISIL A1+ to the short-term borrowing programme of 5,000 crore of PFC. Similarly, Icra Ltd too has assigned a rating of ICRA AAA to the long-term borrowing programme of 43,500 crore. These ratings indicate highest safety of principal and possibility of timely interest payment.

What should you do?

While instruments such as Public Provident Fund offers tax-free interest, the investment limit is capped at 1 lakh. In case of PFC bonds, the same limit has been pegged at 5 lakh for retail investors and there is no limit for HNIs. Thus, for someone having enough surplus and who have already utilized the investment limit of 1 lakh under section 80C of the Income-tax Act, this is a good option. As PFC is a public sector undertaking that has a capital adequacy ratio of more than 18%, the chances of default by the company is unlikely.

However, as interest is payable annually, investors will not get the benefit of compounding. Also, as the company lends mostly to the power sector, any downturn in the sector could adversely affect the financials of the company. The Reserve Bank of India has reiterated a number of times in the past that infrastructure loans particularly to power sector may turn bad because of project delays and other regulatory hurdles.

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