REC Looks To Issue Rare Deep Discount Bonds Next Fortnight

Rural Electrification Corporation Ltd to issue deep discount bonds maturing in over 10 years and is likely to hit the debt market in the next fortnight.

Central Board of Direct Taxes has allowed REC to issue this deep discount bond 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. NDTV Profit has reviewed a copy of the CBDT notification.

According to the notification, REC will be able to raise a maximum of Rs 2,517.85 crore through this issue. The bonds will carry a face value of Rs 5,000 crore.

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

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.

Apart from the tax arbitrage, REC aims to diversify its investor base and reduce the cost of borrowing, Chairman and Managing Director Vivek Kumar Dewangan told NDTV Profit.

Since the pricing of deep discount bonds is low, it will help the issuer to raise funds at a relatively cheaper rate. 

"Basic idea behind all this borrowing is that we want to minimize our cost of funds. We are targeting to bring down our total cost of borrowing to below 7%," Dewangan said.

Dewangan declined to comment on the timeline of this bond issue but confirmed that the company is in exploratory talks with investors regarding this deal.

A deep discount bond different than a plain vanilla bond, wherein interest is paid to the bondholder at predetermined intervals, and the return of the principal amount on maturity date.

This rare bond issuance will likely provide tax benefits to investors too. In the late 90s and early 2000s, ICICI Bank had issued such deep discount bonds.

REC Fund Raising Plans

Separately, REC also plans to tap the offshore market to raise at least $500 million through green dollar-denominated bonds maturing in five years, Dewangan said.

However, the timeline and details of this bond issue is yet to be finalized as REC is awaiting the US Federal Open Market Committee's rate decision on Wednesday.

"We will see how the book building takes place. Including hedging, we want the rate to be below 7%. That's why we had delayed the pricing," Dewangan said.

Overall, the company plans to borrow $20 billion through onshore and offshore markets in the current financial year. For the quarter ended June, REC's cost of funds was 7.05% as compared to 7.23% a year ago.

On the company's disbursement target, Dewangan said that it aims to disburse Rs 1.9 lakh crore in the current financial year. In 2023-24, REC's total disbursements were at over Rs 1.61 lakh crore.