The Icici Safety Net Option

Our columnist takes a look at the first public bonds issue in this financial year

ICICI Safety Bonds is the first public bond issue to hit the market in the current financial year. ICICI is offering unsecured redeemable bonds in the nature of debentures aggregating Rs 300 crore with a greenshoe option of another Rs 300 crore. Needless to add, the Safety Bonds have earned the highest rating from all the three leading rating agencies, CRISIL, CARE and ICRA.

This bond issue comes in three flavours: 1. Regular Income Bond 2. Money Multiplier Bond 3. Tax Saving Bond. This piece takes a look at the important salient features detailed information can be obtained from the offer document.

 

Regular Income Bond

This bond comes with three options. The face value and tenure for all three options is Rs 5,000 and 5 years respectively.

The first option, with a minimum subscription amount of Rs 15,000 carries a coupon of 12.75 per cent payable quarterly. The yield on an annualised basis works out to 13.38 per cent.

The second option with a minimum subscription amount of Rs 10,000 carries a coupon of 13 per cent payable semi annually. The yield on an annualised basis works out to 13.42 per cent.

The third option requires a minimum subscription amount of Rs 5,000 and yields 13.50 per cent payable annually.

Money Multiplier Bond

These are nothing but deep discount bonds with a face value of Rs 4,000.

Option-I doubles the investment in 5.5 years. The yield works out to 13.43 per cent.

Option-II offers four times the investment in 11 years. The yield is similar to the first option i.e., 13.43 per cent.

In this case the investor would be well advised to choose Option-II for obvious reasons. In the current declining rates environment, the investor is better off with locking in his funds for a higher period of 11 years.

Tax Saving Bond

This bond has two options.

Option-I enables the investor to claim exemption from capital gains u/s 54EA. This bond is issued at a face value of Rs 5,000 and carries a coupon of 12.75 per cent. The redemption would be at par after a period of five years.

Option-II offers exemption u/s 54EB. Consequently, the tenure of the bond is seven years. With a face value of Rs 5000, it carries a coupon of 13 per cent.

Note that these bonds offer no rebate u/s 88.

Liquidity

The bonds enjoy excellent liquidity as they are proposed to be listed on the BSE and the NSE. Such instruments get quoted at heavy discounts. To protect the investors, ICICI itself proposes to facilitate market-making. Thus, on any working day a fair price would be available to the investor for his bonds. In fact the process has already been put in place on the NSE in respect of their earlier issues of April and December 1997. This comes as a boon to the small investor who may need his funds to meet an emergency.

Tax Provisions

ICICI had been advised vide the clarification dated May 10, 1993 issued by CBDT stating that interest on its bonds qualifies for deduction u/s 80L. The same should be applicable to the current issue of bonds as well.

Ergo, interest on the Regular Income Bonds and the Tax Saving Bonds will qualify for deduction u/s 80L upto a limit of Rs 12,000. As adequate precaution, ICICI would be applying to the Central Government for notifying the interest on the above mentioned bonds as deductible u/s 80L.

Now as regards taxability of the Money Multiplier Bonds, a CBDT circular clarifies that the difference between the issue price and the redemption price will be treated as interest income. On transfer of the bonds before maturity, the difference between the sale consideration and issue price will be treated as Capital Gains/Loss if the assessee purchased them by way of investment. However, in the case of an assessee who deals in purchase and sale of bonds, securities etc., the profit or loss shall be treated as trading profit or loss.

Sec. 48 has been amended by FA97 to provide for non-application of indexation to LT gains arising from transfer of such bonds.

The clarification, read together with the amendment, makes it apparent that the difference between the sale value and cost of acquisition (without indexation) will be construed as capital gains if the bonds are sold. Conversely, the difference between redemption value and the issue price will be taken as interest if the bonds are redeemed by the company that has issued the bonds.

It is difficult to agree with all this. Its veracity is challengeable. It is illogical to ask an investor who has purchased the bonds from the market, say at a price of Rs 9,000 to treat Rs 5,000 (redemption price Rs. 10,000- issue price Rs 5,000) as his interest income.

I hope that the forthcoming Budget will address this issue.

Conclusion

ICICI launched the bond issue on the eve of the credit policy. This was indeed laudatory, as it was widely expected that the RBI governor, Bimal Jalans debut credit and monetary policy would usher an across the board reduction in interest rates.

The expectations came true as the Bank Rate was brought down to 9 per cent and the fixed repos rate was also lowered to 6per cent. The signal is clear interest rates are set to fall. What took everyone by surprise was the decision to leave the Cash Reserve Ratio (CRR) untouched. But the writing is on the wall: the RBI governor has stated that the CRR would be cut whenever the system needed funds. It could be tomorrow or the day after or even some time later.

A cross section of the market players expect the cut to come through soon, as the Rs. 4,000 crs auction of Government securities will dampen liquidity. The fresh infusion of funds by way of a CRR cut could have a further sobering effect on interest rates. Already short-term rates have dropped considerably. The longer term interest rates, currently in the range of 11.5per cent - 12per cent, are also falling. No other instrument available in the market matches ICICIs risk-return equation. Under current circumstances, an assured yield of 13.5per cent at relatively little or no risk is very attractive indeed. Dhanavarsha(12) of LICMF offers an yield of 13.5per cent also but assures interest for only one year.

Perhaps this is your only opportunity to lock in your funds at a relatively higher return.