NEW DELHI: While IPO parties becoming a thing of the past, the frenzy for tax-free papers is just reaching its zenith in the Indian market. Investors are rushing into these bonds at the fag end of the financial year, amid mounting fears that no tax-free bond issue will be announced in the next financial year. Hudco, whose Rs 1,788.50 crore tax-free bond issue opened on Wednesday, had to foreclose it on the second day itself, as the issue got oversubscribed on the first day itself. Last week, the second tranche of tax-free bonds from NHAI had to be foreclosed on the third day following strong demand from investors. In the ongoing financial year, investors have fully lapped up nine tax-free bond issues on the first day itself. As per a CBDT circular, seven CPSEs were to raise Rs 40,000 crore through tax free bonds this financial year. Finance Minister Arun Jaitley in his Budget speech had said: “The government will permit mobilisation of additional finances to the extent of Rs 31,300 crore by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority through raising of bonds during 2016-17.” Of this, NHAI alone announced plans to raise Rs 15,000 crore in FY17. A financial daily on Wednesday quoted Economic Affairs Secretary Shaktikanta Das, as saying that those infra bonds would not be tax-free in nature. Das said no proposal for issuance of tax-free bonds was pending with the government. Tax-free bonds are considered safer, as they are issued by government-backed entities. But they yield lesser returns. With the market starting to build up a drop in interest rates and the government is making changes in small savings rates, these bonds are attracting investors like never before. “Interest rates are set to decline and it is only a matter of months before the rates fall further. Investors may want to lock in money in tax-free bonds at current rates as there are of long tenures of 10-15 years,” said Vidya Bala, Head of Mutual Funds Research, FundsIndia. “After the recent announcement (in February) that Small savings rates would be reset every quarter and will be closer to the gilt rates, investors appear to prefer tax-free bonds as their returns could be better than small savings (if post-tax returns of smalls savings deposits are considered),” Bala said. The 15-year Hudco bond issue offered a maximum return of 7.69 per cent. A study by ETMarkets.com showed the BSE benchmark has offered an average of 10.6 per cent CAGR in the past 10 calendar years, while the BSE midcap index and smallcap index have generated compounded annual returns of 9.52 per cent and 6.94 per cent, respectively, during the same period. Tax-free bonds generally pick up pace in the third and fourth quarters, as they see healthy demand from retail investors due to the tax benefits they offer before the end of a financial year. Just like bank fixed deposits (FDs), tax-free bonds offer fixed interest to subscribers. While bank FDs attract income-tax benefits according to the standard tax slabs (10, 20 and 30 per cent), tax-free bonds allow I-T exemptions on long-term investment gains. The effective annual yields offered by tax-free bonds are about 300-350 bps higher than prevailing bank fixed deposit rates, depending on the tax structure. If an investor is in the 30 per cent tax bracket, the effective yield for a coupon of 7.69 per cent would be 7.69/(1- 30/100) = 11 per cent. “With falling bond yields, some investors rushed to grab the Hudco tax-free bonds, seeking capital appreciation in the secondary market as rates offered are quite attractive,” Ajay Manglunia, executive vice president-fixed income at Edelweiss Finance told Economic Times. Yields and bond prices move in opposite direction.