Safe Bonds, The Safety Bonds

The third tranche of fund raising for ICICI under its umbrella prospectus is open for subscription presently. In this tranche also ICICI plans to mobilise Rs 300 crore with a green shoe option of retaining a further Rs 300 crore. The issue has been given the highest rating by all the three credit rating agencies. The current issue offers a new bond, the Encash bond, apart from the regular three bonds ie the Tax saving bond, Regular income bond and Money multiplier bond. An analysis of these four bonds.

Encash bond

The bond offers investors the option of liquidating their holding at any time after 12 months from the date of allotment. Another interesting variation is the interest rate which has been stepped up at the end of each year starting at 9 per cent in the first year to 18 per cent in the seventh year. The bond has a seven year tenure with a face value of Rs 5,000 per bond. The yield to maturity works out to a reasonable 14 per cent. The bonds have a 12 month lock-in period after which they can be redeemed at their face value. ICICI has provided a list of centres where investors can redeem their bonds.

 

The bond looks attractive as it provides investors with 'anytime' liquidity after the initial one year lock in period. But remaining locked into this bond for a period of more than two years does not make sense as there are other options in the current issue itself which give higher yields beyond this holding period.

Tax Saving Bond

The almost staple bond from ICICI (ICICI offers bonds of this nature every time it floats a bond issue!) this time comes with the section 88 benefit also. The yield considering the tax benefits under all the four options are good, and offer a good investment plan with tax considerations built in.

Investment in this bond will enable investors to claim tax benefits under Section 88 or Section 54EA or Section 54EB of the Income Tax Act. The tax saving bond comes with four options. The first two options are for those who wish to save tax through the benefits offered under Section 88. The third option is for those who wish to save tax under Section 54EA and the fourth option offers benefits under section 54EB.

The face value of the first option is Rs 5,000 and carries an annual coupon of 12.50 per cent. The tenure of this bond is three years and the yield to maturity is 12.50 per cent. The effective yield to the investor including tax benefits works out to a good 22.3 per cent. The face value of the second option is Rs 5,000 and it is in the nature of a deep discount bond. It will be redeemed after a period of three years and three months at Rs 7,350. This gives the investor a reasonable yield of 12.60 per cent. Yield to the investor including tax benefits works out to 20.6 per cent.

The face value of the third option is Rs 5,000 and it will be redeemed at its face value after a period of three years. Interest is payable at 12.50 per cent annually. Assuming that the investor invests 80 per cent of the capital gains (that arise from previous investments) under Section 54 EA, in this option the yield with tax benefits works out to a good 20.10 per cent. Similarly, for an investment of 20 per cent of capital gains, the yield including tax benefits works out to 14.20 per cent.

The fourth option has a tenure of seven years and this will enable investors to claim tax benefits under Section 54EB of the Income Tax Act. It is issued at a face value of Rs 5,000 with a coupon of 13 per cent. The yield with tax benefits works out to 18.3 per cent, which is attractive.

Regular Income Bond

The third bond in the current offering carries a regular income and has three options. The face value of the bond in all the three options is Rs 5,000 and the tenure is seven years. The minimum subscription amount in option I should be Rs 15,000, and this comes with an interest of 13.25 per cent payable quarterly. The effective yield on this bond works out to 13.9 per cent.

The minimum subscription amount in the second option is Rs 10,000. The interest is payable half yearly at the rate of 13.50 per cent. The yield for option II works out to 14 per cent. The minimum subscription for option III is Rs 5,000 which carries an annual interest of 14 per cent. The yield on this bond is 14 per cent. Investors would be better off by subscribing to the third option as it gives a higher yield among the three options available.

Money Multiplier Bond

The Money Multiplier bond in the current series is in the nature of a deep discount bond having different face values. There are three options in the current offering. The first option is issued at Rs 4,000 with a face value of Rs 6,000. The tenure of the bond is for a period of three years and three months. The yield on this option works out to 13.3 per cent. The second option in the money multiplier bond is also issued at a discounted price of Rs 4,000 but the face value of the bond is Rs 16,000 with a tenure of 10 years and seven months giving the investors an yield of 14 per cent. The third option, the longest tenure bond being issued in the current year, is issued at a price of Rs 4,000 and is redeemable at a face value of Rs 1,00,000. The tenure of this bond is for a period of 24 years and 2 months, giving the investor an yield of 14.2 per cent.

The yields offered in this issue are better than what are available in the market considering the rating and the credibility of the institution. Also, the interest rate scenario not clear, and the recent increase in interest rates by banks have been only at the short term ie less than a year.

How does the bond issue compare with other options available in the market? Dedicated debt funds like the JM Liquid fund, KP Income Builder, Unit Scheme '95 which are performing well, offer returns in the range of 10 to 15 per cent. An advantage of using the mutual fund route is that the income is in the form of dividend which is tax-free while interest income is taxable. Also, any interest income upwards of Rs 2,500, attracts a TDS (tax is deducted at source). Moreover, there are easy exit opportunities in most of the debt funds and it may be possible to actually get the money back in just a couple of days in case of an exit. Though ICICI plans to get the bonds listed in the stock exchanges liquidity for such instruments is typically low. Of all the four bonds the Encash bond looks attractive for a one to two year tenure. The Money Multiplier bond looks good for a long term investment and the first two options of the Tax Saving bond too look attractive.