The government's projection of a debt market revival may be misleading as the current trend of listing debt offerings is prompted more by the issuer's perceived need to help investors beat the tax deduction at source (TDS) norm rather than to create a secondary market in their instruments.
Income tax rules allow an investor to tax plan if his dividend earning from listed debt instruments is less than Rs 2,500 per annum. This facility is not available in the case of unlisted debt where tax is deductible at source by the issuing company. This has led investors, including financial institutions, to insist on the listing of an issue before tying up loans.
This is possible as a large part of the Rs 28,000 crore raised through the debt market this year was through the private placement route which makes it possible for the lender to get the issuing company to structure the instrument according to his requirement.
The investor then keeps individual application sizes below Rs 16,000 which would keep his annual dividend earnings below Rs 2,500. The application size is calculated on the basis of an average rate of return of 15 per cent.
The idea is not to avoid tax which is payable anyway but to give oneself the opportunity to tax plan. Thus, it is the investor that decides when it/he will pay taxes and not the company, a market analyst said.
Although most issuers are seeking to list their debt instruments in view of investors' tax planning priorities
