A new bond issue has hit the market. IFCI Ltd, India’s oldest development financial institution, has come with Tier II subordinate bonds, which will remain open for subscription till 15 July.
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The company plans to raise at least Rs 150 crore through the bonds. However, since it has the green shoe option, which enables a company to raise more funds, bonds worth Rs 1,200 crore may be on offer.
These are non-convertible bonds; individuals as well as companies can invest in them.
The bonds have a face value of Rs 10,000 each. The minimum you can invest is Rs 1 lakh and the maximum Rs 50 crore.
The bonds come with two maturity tenors of 10 and 15 years. For 10 years, it carries an interest rate of 10.5% and for 15 years, 10.75%.
For both tenors, you can choose between annual and cumulative options. Under the annual option, you will get interest at the end of each year; in the cumulative option, the accumulated interest will be paid at the end of the tenor.
IFCI can exercise the call option in these bonds. This means that it can buy back bonds at a predetermined time. The call option can be exercised at the end of seven year for 10-year bonds; for 15-year bonds, this can be done at the end of 10 years. But it does not have a put option for investors. In other words, you will not be able tender back the bonds before maturity.
The bonds will be issued in demat form and will be listed on the Bombay Stock Exchange. These bonds have been assigned ratings of AA, A and LA by Brickwork Ratings India Pvt. Ltd, CARE Ratings (Credit Analysis and Research Ltd.) and ICRA Ltd, respectively.
Subordinate bonds are unsecured instruments, which means if the company is in financial trouble, it will meet its other obligations before compensating investors.
What you earn after tax
Though the returns from these bonds look attractive, calculate the tax payable on them and they lose some of their sheen. These bonds are taxed at your marginal rate.
The post-tax yield on a 10-year bond will reduce to 9.41% if you are in the lowest tax bracket of 10.3%. The yield goes further down to 8.33% for those in the 20.6% tax bracket; the bite is obviously the largest for the highest bracket of 30.9% with the yield coming down to 7.25%. For 15 years, the post-tax yield is 9.64%, 8.53% and 7.42%, respectively.
What to do
If you are in the middle or highest tax bracket, you will be better off investing in a Public Provident Fund (PPF), which not only gives tax-free returns but also provides a tax deduction at the time of investing. The only bonds on which you can avail additional tax deduction up to Rs 20,000 are infrastructure bonds and the IFCI bonds do not fall in that category.
“The bonds make sense for individuals in the lower tax bracket as the post-tax return is around 9.5% (over both tenors), which no investment tool offers as of now, including PPF, for such a long period,” says Satkam Divya, business head, Rupeetalk.com, a NetAmbit Venture.
But remember that these are unsecured instruments.
Graphic by Yogesh Kumar/Mint