India's REC attracts hefty investor demand for rare bond issue

India's REC witnessed strong demand for a rarely-used type of corporate bond, as investors flocked to the state-run firm's issuance which also provides a tax benefit, merchant bankers said on Monday.

"The bond issue witnessed demand from across the segment including qualified institutional buyers, high network individuals, family offices and other such investors, because this is a very unique product," said Umesh Khandelwal, chief business officer at Tipsons Group.

The non-banking financial company raised 50 billion rupees ($596.7 million) through a deep-discount zero-coupon bond at a yield of 6.25%.

The base size of the issue was 10 billion rupees, with a greenshoe option of 40 billion rupees.

The company received bids worth 336.7 billion rupees, nearly 34 times of the base issue and more than seven times the entire issue. The bonds were rated AAA by rating agencies.

"The current tax-free bonds are yielding just around 5.20%-5.25%, and even if we consider post-tax returns for the current REC bond issue, it works out to be around 5.47%-5.48%, which is very attractive," said a senior merchant banker requesting anonymity, as he is not auhtorised to speak to media.

Deep-discount bonds are generally issued at a more than 20% discount to their face value, and do not pay regular interest, a feature similar to zero-coupon notes that removes reinvestment risks.

"While the bonds are not entirely tax-free, they offer a significant long-term capital gains benefit, making them a stand-out," said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap.

The bonds offer a tax benefit as the long-term capital gains tax on these notes is 12.5%, lower than what is usually charged based on the income group of investors.

"You can say tax efficient structure and scarcity value led to the keen demand," said Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership.

Earlier this year, Reuters had reported that REC was planning to raise 50 billion rupees through such bonds.