The Union government has reduced the cap on subscription by retail investors in the ~3,000-crore tax-free bond issue of Rural Electrification Corp (REC) to ~1 lakh, from ~5 lakh that was allowed for previous such issues.

A notification dated February 14 issued by Central Board of Direct Taxes (CBDT) clearing the issue has said that "any individual investing over ~1 lakh will be classified as high net worth individual (HNIs)".

All previous tax-free bond issues from National Highways Authority of India (NHAI), Power Finance Corp, Housing and Urban Development Corp, and Indian Railway Finance Corp allowed retail investors to invest up to ~5 lakh.

Some investors feel the move will unduly help HNIs and institutions garner a better share of the issue. Arun Kejriwal, director, Kejriwal Research and Investment Services said, "The unsubscribed retail portion, which is going to be significant, will be cornered by the larger investors." Kejriwal also said the move is an infringement of the market regulator's territory. "Securities and exchange Board of India (Sebi) has the jurisdiction over public issues of both debt and equity. How can a tax authority or an individual company decide unilaterally who is a retail investor? If at all CBDT wants to change, it has to do it through Sebi." In 2010, Sebi doubled the limit for retail investors to ~2 lakh.

REC's tax-free bond issue is likely to open on March 5. Ajay Manglunia, senior vicepresident, Edelweiss Securities, said, "The move will impact retail participation. Most of the retail investors were investing ~5 lakh in these bonds, now if the limit is reduced to ~1 lakh you will need much more applications, which could be tough to get." According to Manglunia even in equity offerings, where the risk is much higher and the issues are relatively smaller, retail investors are allowed to invest up to ~2 lakh. "Considering this, the retail quota for bond issues has to be much higher," he added.