PFC May Raise Rs 10,000 Crore, Four Others Seek Government Nod To Issue Deep Discount Bonds

Frequent issuer Power Finance Corp. is in talks with investors to raise up to Rs 10,000 crore through the issue of zero coupon bonds by May, four merchant bankers told NDTV Profit.

The discussions are going on. PFC is planning to issue these bonds either by the end of April or by May. They are also considering coupon bearing bonds as well, a merchant banker involved in the transaction said.

On March 11, the Central Board of Direct Taxes gave an approval to the state-owned entity to issue a deep discount bond maturing in 10 years. According to the notification, PFC will be able to raise a maximum of Rs 49,546 crore through this issue.

Earlier in April, Housing and Urban Development Corp. also received a similar clearance to issue five-year zero coupon bonds. The company will be able to raise a maximum of Rs 2,351.49 crore through this issue.

Following a successful issue by REC last year, other public sector companies are also making a beeline to tap the debt market with zero coupon bonds.

National Bank for Agriculture and Rural Development, Small Industries Development Bank of India, Indian Renewable Energy Development Agency, Indian Railway Finance Corp. and even REC are said to have been seeking the government's approval to issue such bonds.

A deep discount bond is a security sold at a discount of over 20% than its face value.

The government is giving an approval to issue these bonds because the entire income received from investors will be considered under long-term capital gains tax instead of interest income, making these bonds tax efficient.

It pays low or no coupon payments to the bondholder during its entire holding period and is a guarantee by the issuer to pay the bondholder a greater amount, than the amount originally invested, on the maturity date.

While government securities are taxable, if held for over a year, these bonds will only be taxed at 12.5% under the long-term capital gains tax, bankers said.

On Sept. 30, 2024, REC had raised over Rs 2,700 crore through the issue of deep discounted bond at a derived yield of 6.2483%. The bonds have a maturity of Nov. 3, 2034.

The bonds were issued at a price of Rs 54.24 and investors would receive Rs 100 at the time of redemption because of the discount. The issue had garnered strong demand from high net worth individuals, corporate treasuries and insurance companies.