REC Raises Over Rs 2,700 Crore Via Deep Discounted Bond

Rural Electrification Corp. on Monday raised over Rs 2,700 crore through the issue of deep discounted bond at a derived yield of 6.2483%, three people in the know told NDTV Profit. The bonds have a maturity of Nov. 3, 2034.

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

Last year, the Central Board of Direct Taxes had 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. This makes these bonds tax efficient.

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, they said.

The issue had a base size of Rs 1,000 crore and a greenshoe option of Rs 4,000 crore. The bonds rated AAA by CRISIL Ratings will be allotted on Oct. 3, 2024.

On Sept. 17, NDTV Profit exclusively reported that REC Ltd. plans to issue zero coupon bonds, which are also called deep discounted bond in late September.

A deep discount bond is a security sold at a discount of over 20% of 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.

A deep discount bond is 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 Ltd. had issued such deep discount bonds.