Latest news with #ZCBs
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Business Standard
13-06-2025
- Business
- Business Standard
Nabard gets approval to raise ₹19.5K cr via deep-discount zero-coupon bonds
India's National Bank for Agriculture and Rural Development (Nabard) has obtained federal government approval to raise up to Rs 19,500 crore ($2.3 billion) through deep-discount bonds. Nabard can raise funds via these deep-discount zero-coupon bonds, which mature in 10 years, 11 months, and 13 days, until the end of March 2027, a government document showed on Friday. Deep-discount bonds are typically issued at a discount of over 20-25 per cent to their face value and do not pay regular interest, similar to zero-coupon notes. This feature eliminates reinvestment risks, as the bonds are redeemed at face value at maturity. Since March, this is the fifth time the government has approved a state-run firm to issue deep-discount debt, and is the largest amount approved so far. Earlier this month, state-run REC also received a government nod to issue these bonds. In March, Power Finance Corp was allowed to issue Rs 10,000 crore of such debt, followed by Housing and Urban Development Corp in April, and Indian Railway Finance Corp was given the go-ahead in May . All these firms must complete their fundraising by the end of March 2027. While the state-run firms have been rushing to seek approval for this rare corporate structure, these issues have not seen sufficient demand from investors. "Zero-Coupon Bonds have hit a rough patch lately, with the last issue was pulled back due to muted investor appetite and upward pressure on yield expectations. But this near-term hiccup doesn't alter the structural appeal of ZCBs particularly in a softening rate cycle," said Venkatakrishnan Srinivasan, founder and managing partner at debt advisory firm Rockfort Fincap. "If priced right by the investors in the primary market, ZCBs can be attractive, aiming to lock in duration without worrying about reinvestment risk. Plus, the deep discount structure offers potential tax efficiency under current capital gains norms, making them worth a closer look despite current bid-ask mismatches," Srinivasan added. Weak investor demand led to the withdrawal of two recent issues, including Power Finance Corp's planned deep-discount debt issue on June 9. The state-owned company received bids worth just Rs 14,700 crore ($171.91 million), against its target of Rs 2000 crore, which had a base issue size of Rs 500 crores.
Mint
12-06-2025
- Business
- Mint
PFC's repeated withdrawals could hit fresh zero-coupon debt issuances
Issuer interest in zero-coupon bonds (ZCBs) faces a potential setback after state-run Power Finance Corporation (PFC) pulled its planned offering for a second time in a row, reportedly due to a mismatch in yield expectations, experts said. Following approval from the Central Board of Direct Taxes (CBDT) on 11 March 2025, PFC decided to launch its 10-year zero-coupon bonds, according to an official notification, with a base issue size of ₹500 crore and a green shoe option to raise additional ₹1,500 crore in the event of high demand from investors. Business Standard reported on Monday, citing sources, that PFC has withdrawn its zero-coupon bond issuance for the second time in just over a month, as investors demanded higher yields than what the issuer was willing to offer. PFC had previously withdrawn the issuance on 30 April, 2025. Also read: Power Finance Corporation Q3 results: Net profit rises 23% YoY to ₹5,829 crore, announces third interim dividend 'The subdued response on Monday (to the PFC bond issuance) from both arrangers and investors suggests that issuers may need to revisit their strategy, timing, and pricing assumptions. Although CBDT approvals provide flexibility over the issuance window, market conditions will ultimately dictate whether ZCBs can sustain their relevance," said Venkatakrishnan Srinivasan, founder and managing partner of financial advisory firm Rockfort Fincap LLP. Last year, another state-owned company REC Ltd raised ₹5,000 crore in zero-coupon bonds at an aggressive price, which led to other issuers queueing up to launch such bond sales. Srinivasan said the REC issue, priced at a 6.25% coupon, was roughly 61 basis points (bps) below the 10-year government bond yield (6.86% annualized at the time) and nearly 80-90 bps lower than comparable taxable bonds from similar AAA-rated issuers. 'Market participants at the time saw zero-coupon bonds as a viable substitute to the erstwhile tax-free bonds, especially when the market linked debenture (MLDs) too as a tax saving instrument phased out," said Srinivasan. According to him, while G-sec yields have softened significantly since April, driven by surplus liquidity, successive rate cuts, and a dovish RBI stance—the yields on zero-coupon bonds (ZCBs) have, paradoxically, hardened in the secondary market. This disconnect, he explained, stems from poor secondary market liquidity in ZCBs, which persists despite the overall abundance of systemic liquidity and monetary policy measures. As a result, investors and arrangers who aggressively bid at lower yields last year in the primary market are now facing challenges. Also read: HUDCO Q4 Results: PAT rises 4% to ₹728 crore YoY, NBFC declares final dividend of ₹1.05 per equity share Zero-coupon bonds approved by the CBDT are debt instruments issued at a discount to face value and redeemed at face value, with no periodic interest payments. These bonds, often issued by government entities, are primarily used for infrastructure financing. CBDT approval grants them a specific tax treatment, classifying gains on redemption as long-term capital gains, which are generally taxed at a lower rate than regular income. The zero-coupon bonds not approved by the CBDT are issued by corporates and high-yield entities, and fall under regular income tax rules. So, returns from these bonds are taxed as per the investor's applicable income tax slab. Before the PFC issue, there was quite a bit of interest among public sector enterprises. According to a Reuters report in April, six state-owned companies have sought approval from the government to issue deep discount bonds. These include Indian Railway Finance Corp. (IRFC), Indian Renewable Energy Development Agency (IREDA), Power Grid Corp. of India, REC, Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development (NABARD). That apart, Housing and Urban Development Corporation Ltd (HUDCO) in April received CBDT approval for issuance of zero-coupon bonds of ₹5,000 crore, according to an official notification. Indian Railway Finance Corporation Ltd, in May, also received approval from CBDT for issuance of its 10-year zero-coupon bond with ₹10,000 crore to be paid on maturity. PFC and REC are among the government entities that have received CBDT approval. Emails sent to PFC, REC, IRFC, Power Grid, SIDBI and HUDCO remained unanswered till press time. NABARD declined to comment. When asked about IREDA's plan for the upcoming zero-coupon bond issuance following PFC's withdrawal, its spokesperson redirected Mint to a press release issued on Wednesday, stating that the company had raised ₹2,005.90 crore through a qualified institutional placement (QIP). The value of zero-coupon bonds raised by both private and public entities was at ₹44,009 crore in FY24 and at ₹32,184 crore in FY25, according to data from Prime Database. This data include both CBDT-notified and non-notified zero-coupon bonds. In FY25, major issuers included Porteast Investment Pvt. Ltd, Reliance Capital Ltd, Jsquare Electrical Steel Nashik Pvt. Ltd, besides others. Experts said CBDT-approved zero-coupon bonds still offer structural advantages, such as favourable capital gains tax treatment, zero reinvestment risk, and issuance by AAA-rated public sector entities. However, the lack of secondary market depth and declining relative value are reducing investor enthusiasm. 'Zero coupon bonds offer returns by being issued at a discount and redeemed at face value, and the internal rate of return reflects what an investor earns if the bond is held till maturity. These bonds are treated as debt for tax purposes, so the gains are usually taxed as interest at the investor's slab rate," said Anil Gupta, senior vice-president and group head of financial sector ratings at Icra. 'But if held for more than one year, the returns may qualify as long-term capital gains with indexation benefits. That makes them more tax-efficient than traditional debt products, especially for long-term investors in higher tax bracket," said Gupta. Others also pointed to the taxation benefit on these bonds and said that zero-coupon bonds are gaining traction with high-net-worth individuals (HNIs). Also read: Direct tax authority charts route to achieve target after ₹1 tn relief 'These bonds also offer cash flow efficiency, as there's no interest payment during the tenure, and the entire bond matures at face value, implying that all interest payments are reinvested at the same yield," said Suresh Darak, founder and chief executive officer of fintech platform Bondbazaar. He said investors in this segment are willing to invest at regular intervals based on their cash flow and income needs. However, since these bonds are privately placed and listed bonds, intermediaries need to subscribe in the primary market and distribute them to HNIs in the secondary market. 'Given the yield is around 5.5-6%, intermediaries face a negative carry of nearly 2% due to borrowing at higher rates. This sometimes leads to a slightly higher primary yield if demand is spread over the next few months to cover the upfront negative carry for intermediaries," said Darak.
Time of India
05-06-2025
- Business
- Time of India
REC gets CBDT nod to issue ₹5,000 crore Zero Coupon Bonds
New Delhi: REC Limited , a Maharatna Central Public Sector Enterprise under the Ministry of Power, has received approval from the Central Board of Direct Taxes (CBDT) to issue Zero Coupon Bonds (ZCBs) aggregating ₹5,000 crore. The bonds will have a tenure of ten years and six months. According to a notification dated May 30, 2025, issued by the Department of Revenue, Ministry of Finance, the approval allows REC to issue five lakh ZCBs. These instruments will be issued at a deep discount and redeemed at face value upon maturity, offering tax advantages to investors under the Income-tax Act, 1961. In FY 2024–25, REC had issued CBDT-notified ZCBs worth ₹5,000 crore, which received subscription nearly seven times the offered amount. That issue was priced at a yield of 6.25 per cent, approximately 100 basis points lower than the prevailing market rates . "The success of the previous issue enabled REC to tap into a new segment of investors while further diversifying its funding sources at competitive rates," the company stated. REC, which functions as a leading non-banking financial company (NBFC), said it remains committed to exploring innovative financial instruments for efficient fund mobilisation to support India's growing energy infrastructure .
