Popularity of convertible euro bonds
A convertible bond
issue allows an Indian company far greater flexibility to tap the Euro market
and ensures that the issue has a better market reception than would be possible
for a direct equity issue. Moreover, newly industrialized countries such as
Korea have chosen the convertible bond market as a stepping-stone to
familiarity and acceptance of their industrial companies in the international
market. The convertible bonds offer the following advantages:
a. Protection: Euro
convertible bonds are favored by international investors as it offers them the
advantage of protection of their wealth from erosion. This is possible
because the conversion is only an option, which the investors may choose to
exercise only if it works to their benefit. This facility is not available for
equity issues.
b.
Liquidity: Convertible
bond market offers the benefit of the most liquid secondary market for new
issues. Fixed income funds as well as equity investment managers purchase
convertible bonds.
c.Flexibility: The
feature of flexibility in structuring convertible bonds allows the company to
include some of the best possible clauses of investors’ protection by
incorpo0rating the unusual features of equity investments. A case in point is
the issues made by the Korean corporate sector, which contained a provision in
the issue of convertible euro bonds. The provision entitled the holders to
ensure the due compliance of the liberalization measures that had already been
announced within a specified period of time. Such a provision enabled the
investor to opt for a put‘ option.
d. Attraction
investment: The issue of convertible debentures
facilitates removal of many of the unattractive features of equity
investment. For investors, convertible bond market makers are the principal
sources of liquidity in their securities.
Bond Issue –Indian
Experience
In recent times,
all-India financial institutions have come to design and introduce special and
innovative bond instruments exclusively structured on the investors’ preferences
and funds requirement of the issuers. The emphasis from the issuer’s view point
is the resource mobilization and not risk exposure. Several financial
institutions such as the IDBI, the ICICI, etc. are engaged in the sale of such
bonds. A brief description of some these bonds are presented below:
1. IDBIs Zero Coupon Bonds, 1996:
These bonds are sold at
a discount and are paid no interest. It is of great advantage to issuers as it
is not required for them to make periodic interest payment.
2. IDBIs Regular Income Bonds, 1996:
These were the bonds
issued by the IDBI as 10-year bonds carrying a coupon of 16 percent, payable
half-yearly. The bonds provided an annualized yield equivalent to 16.64
percent. The bonds, which were priced at Rs.5, 000 can be redeemed at the end
of every year, after the third year allotment. There was also a call option
that entitled the IDBI to redeem the bonds five years from the date of
allotment.
3. Retirement Bonds, 1996:
The IDBI Retirements
Bonds were issued at a discount. The issue targeted investors who are planning
for retirement. Under the scheme,. Investors get a monthly income for 10 years
after the expiry of a wait period, the wait period being chosen by the
investor. Thereafter, the investors also get a lump sum amount, which is the
maturity value of the bond.
4. IFCIs Bonds, 1996
These bonds include:
a. Deep
Discount Bonds –Issued for a face value of Rs.1 lakh
each.
b.
Regular Income and Retirement Bonds
–They
had a five-year tenure, a semiannual yield of 16 percent and a front-end
discount of 4 percent. The bonds had three-year put option and an early bird
incentive of 0.75 percent.
c.
Step-up Liquid Bond –The
five-year bonds with a put option every year with a return of 16 percent,
16.25 percent, 16.5 percent, 16.75 percent, and 17 percent at the end of every
year.
d. Growth
Bond –An investment of Rs.20, 000 per bond under this
scheme entitles investors to
a
Rs.1 lakh face-value bond maturing after
10 years. Put options can be exercised at the end of 5 and 7 years
respectively. If exercised, the investor gets Rs.43, 500 after 5 years and
Rs.60, 000 after a 7 year period.
e.
Lakhpati Bond –The
maturity period of these bonds varied from l5 to 10 years, after which the
investor gets Rs.1 lakh. The initial investment required was Rs.20,000 for 10
years maturity,
Rs,.23,700 for 9 years,
Rs,28,000 for 8 years, Rs.33,000 for 7 years, Rs.39,000 for 6 years and
Rs.46,000 for 5 years maturity.
5. ICICIs Bonds, 1997 ICICI
came out with as many as five bonds in March 1997. These are encash
bonds, index bonds, regular income bonds, deep discount bonds, and capital gain
bonds. The bonds were aimed at meeting the diverse needs of all categories of
investors, besides contributing to the widening of the bond market so as to
bring the benefits of these securities to even the smallest investors.
a.
Capital gains bond - Also
called infrastructure bonds incorporated the capital gains tax relaxations
under Section 54EA of the Income Tax Act announced in the Union Budget for
1997-98. They are issued for 3 and 7 years maturity. 20 percent rebate was
available under Section 88 of the I.T. Act for investors on the amount invested
in the capital gains bonds up to a maximum of Rs.70, 000. They can avail
benefit under Section 88. The annual interest rate worked out to 13.4 percent
while the annual yield came to 20.7 percent. However, investment through stock
invest will not qualify for the rebate.
Encash Bond –The
five-year encash bonds were issued at a face value of Rs.2,000 and can be
redeemed at par across the country in 200 cities during 8 months in a year
after 12 months.
The bond had a step-up
interest every year from 12 to 18.5 percent and the annualized yield at
maturity for the bond works out to 15.8 percent. The encashing facility, however,
is available only to the original bondholders. The bonds not only offer higher
return but also help widen the banking facilities to investors. The secondary
market price of the bonds is likely to be favorably influenced by the step-up
interest that results in an improved YTM every year.
c. Index Bond –It
gives the investor both the security of the debt instrument and the potential
of the appreciation in the return on the stock market. Priced at
Rs.6,000 the index bond has two parts:
Part A is
a deep discount bond of the face value of Rs.22,000 issued for a 12 year
period. Its calculated yield was 15.26 percent. It also has a call and a
put option attached to it assuring the investor a return of Rs.9, 300 after 6
years option is exercised.
Part B is
a detachable index warrant issued for 12 years and priced at Rs.2,000. The
yield was linked to the BSE SENSEX. The face value of the bond will
appreciate the number of times the SENSEX has appreciated. The investors‘
returns will be treated as capital gains.
6. Tax Free Bonds: The
salient features of the tax-free Government of India bonds to be issued from
October 1, 2002 are as follows:
a. Interest
rate –The bonds will carry an interest rate of 7 percent.
b. Tax
exemption –The bonds will be exempt from Income-tax
and Wealth-tax.
c. Maturity
–The
bonds will have a maturity period of six years.
d. Ceiling
–The
bonds investment will have no ceiling.
e. Tradability
- The
bonds will not be traded in the secondary market.
f.
Investors –The
eligible investors include individuals and Hindu Undivided Families, NRIs are
not eligible for investing in these bonds.
g. Issue
price Bonds will be issued for a minimum amount of
Rs.1,000 and its multiples.
h.
Maturity value –The
cumulative maturity value of the bond will be Rs.1.511 at the end of six
years.
i.
Form of issue –The
bonds will be both in demat form as well as in the traditional form of stock
certificates. Option once chosen cannot be changed.
j.
Transferability –Bonds
will not be transferable except by way of gift to relatives as defined in
the Companies Act.
k. Collaterals –The
bonds cannot be used as collaterals for obtaining loans from banks, financial
institutions and non-banking financial companies.
l. Nomination –A
sole holder or a sole surviving holder of the bond being an individual can
make a nomination.
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