REC looks forward for fundraise worth Rs 5,000 crore through zero-coupon bonds

State-owned REC Ltd is looking to raise an additional Rs 5,000 crore in the current financial year (FY25) through the issuance of deep-discount zero-coupon bonds, according to sources. The infrastructure-based PSU had previously raised Rs 5,000 crore through the Central Board of Direct Taxes (CBDT)-notified zero-coupon bonds on September 30 of this year, offering an effective yield of 6.25% per annum. The issue saw overwhelming demand, with the bonds being oversubscribed by nearly seven times the issue size of Rs 5,000 crore.

The issuance had a base issue size of Rs 1,000 crore, with a greenshoe option of Rs 4,000 crore. The company received bids worth Rs 33,670 crore, nearly 34 times the base issue.

Zero-coupon bonds are issued at a deep discount and redeemed at face value. They offer investors tax advantages as the redemption is classified as long-term capital gains and taxed at a lower rate of 12.5% per annum due to the CBDT notification.

Deep-discount bonds are typically issued at a discount of over 20% to their face value and do not pay regular interest. Similar to zero-coupon bonds, this structure eliminates reinvestment risk for investors. Meanwhile, REC raised Rs 3,000 crore last week through the issuance of 15-year bonds at a tight pricing of 7.09%.

This marked the first long-tenure (10 years and above) bond issuance by a ‘AAA-rated entity in some time, signaling strong demand from long-term investors, including insurance companies and pension funds.

This reflects a growing urgency among these investors for high-rated corporate bonds, particularly in the case of rare long-tenure issuances. Additionally, REC also raised Rs 2,901 crore through 5-year bonds at a coupon rate of 7.34%.

Additionally, the Indian Railway Finance Corporation (IRFC) – a dedicated financing arm of the Indian Railways for mobilizing funds from domestic as well as overseas capital markets – is seeking bids from investors in the domestic capital market to raise Rs 3,000 crore through bonds maturing in 15 years. The issuance has a base size of Rs 500 crore and a greenshoe option of Rs 2,500 crore. The bonds are rated ‘AAA’ by domestic credit rating agencies Icra, Crisil, and Care.