Bonus debentures: Decide based on asset allocation, say analysts

Those in higher tax bracket may shift to instruments offering indexation benefit

Britannia Industries has allotted bonus debentures to its shareholders. Each investor will get a debenture of face value Rs 29 for each fully paid-up equity share held on May 27, 2021.    

These unsecured debentures will pay an annual coupon of 5.5 per cent, which will be paid at intervals of 12 months from the date of allotment (June 3, 2021). They will be redeemed (Rs 29 face value paid) after three years on June 3, 2024. The issue size is Rs 698.52 crore. These instruments enjoy an AAA (stable) rating from CRISIL and ICRA, and will be listed on both the BSE and the National Stock Exchange.

Deferring cash payout

Britannia has announced a dividend of Rs 12.5. These bonus debentures are being offered in addition.

Companies distribute their profits via two modes primarily: cash dividend and bonus shares. 

“Cash dividend involves massive outflow of funds from the company. Bonus shares lead to dilution of the equity base, resulting in lower earnings per share,” says Archit Gupta, founder and chief executive officer, ClearTax. 

Bonus debentures offer an advantage. 

Says Ankur Kapur, managing partner, Plutus Capital, a Securities and Exchange Board of India (Sebi)-registered investment advisory firm: “The company manages to retain cash by delaying the payout to investors.”

Companies also take this route if they think they are under-leveraged. 

“By issuing bonus debentures, the company shifts some of its reserves from shareholders' equity to the debt part of its balance sheet,” says Ramabhadran Thirumalai, associate professor-finance, Indian School of Business. 

According to Gupta, this strategy suits low-debt companies and allows them to improve their return on equity. 

Britannia Industries’ debt-to-equity ratio stood at 0.58 at the end of March 2021.

This route also offers a tax advantage. 

“The company will get to deduct interest expense before paying tax,” adds Thirumalai. 

Hindustan Unilever, NTPC, Bluedart, and Dr. Reddy’s have taken this route in the past.    

Higher payout, albeit with delay

Britannia could have just paid Rs 12.5 as dividend, citing a difficult year. The fact it is making a payout over and above that, albeit with a delay, is a positive, observed experts. 

The 5.5-per cent coupon compares favourably with the 4.9-5.3 per cent that State Bank of India pays currently on its one- to three-year-plus fixed deposits. 

“A 20-40-basis point premium from these AAA-rated bonds is okay,” says Kapur.    

Should you sell?

Retired people will welcome this mode of payout. 

“It will provide certainty to their cash flows for the next three years,” says Thirumalai. 

Younger, growth-oriented investors, who may want a larger portion of their portfolio to be in equities, may not like receiving debentures where the upside is limited.  

Those who wish to cash out can sell them on the exchanges. 

“Decide to hold or sell, based on whether these debentures fit into your asset allocation,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Sebi-registered investment advisor.  

Investors in the higher tax bracket may not like to hold these instruments where they will be taxed at a slab rate. 

“They could move to more tax-efficient debt products, where they will get indexation benefit, such as debt funds. They could also move to an ins­trument like a Public Provident Fund that pays 7.1-per cent tax-free interest,” adds Raghaw.

The decision to sell should also be governed by whether these debentures trade at a premium or discount. Due to the illiquid nature of the bond market, they may trade at a discount. 

If many shareholders try to exit, that could create opportunities for savvy investors. 

“If the price dips below face value, the yield could turn attractive,” says Kapur.