The Reserve Bank of India's successive interest rate hikes since March 2010 to rein in inflation has created an environment conducive for fixed income instruments. The 10^th successive increase in the key policy rates (repo at 7.50% and reverse repo at 6.50%) is a welcome move for the investors preferring fixed income instruments. Currently even banks are offering lucrative interest rates on their 1 - Yr fixed deposits (7.25% - 9.25%).

 

Hence, in order to take advantage of this situation, the Industrial Financial Corporation of India (IFCI) Limited is currently offering Tier II Subordinate Bonds - Series I from June 01, 2011 on private placement basis. These bonds have to be applied mandatory in demat form. The proceeds of the issue will be used to augment the long-term rupee resources for carrying out financing activities of the Company by simultaneously augmenting the supplementary capital of the company.

 

The issue opens for subscription from June 1, 2011 and is available for subscription till July 15, 2011 with an option to pre-close the issue or extend the closing date by giving 1 day notice to the arrangers.

 

The details of the offering (Tier II Subordinate Bonds) are as follows:

Note: PAN card is mandatory for subscribing to these bonds. A self attested copy shall be enclosed along with the application form.

 

Investors' will also have the following options available at the time of subscribing to the issue:

(Source: IFCI Ltd. & PersonalFN Research)

 

Well, after reading the details of the bonds (as provided above), there may be still some more questions popping up, which are answered hereunder:

 

• Will I get any tax benefit if I invest in these bonds?
  
  No, these bonds do not entitle you to any tax benefit nor are these any "infrastructure bonds", which make you eligible for an additional tax deduction under section 80 CCF.
   
• What is the Tax Treatment of interest on these Bonds? Are these Bonds Tax Free?
  
  No, the interests on these bonds are not tax free - they are chargeable to tax. The interest income will be taxed under "income from other sources", and will be brought to tax at the respective income tax rates you fall under. The Tax Deduction at Source (TDS) will not take place as these bonds are issued a demat form and are listed on the exchange.
   
• Can a minor apply to these bonds?
  
  Yes, a minor can apply for these bonds, but only through a guardian.
   
• Can one apply in joint names?
  
  Yes, one may apply in a joint name (but not exceeding three). However, the demat accounts will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account.
   
• Who will get the interest in case of joint application?
  
  In case of joint application, interest will be accounted to the first holder only.
   
• My demat account is in joint name, but I want to apply is a single name?
  
  In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.
   
• If I'm an NRI can I invest in these bonds?
  
  No, NRIs are not eligible to invest in these bonds.
   
• Is there a lock-in period while investing?
  
  No. There is no lock-in period for these bonds.
   
• In whose favour the cheque is to be made?
  
  Cheques have to be made in the favour of "IFCI Limited-Tier II Bonds" and crossed "A/C PAYEE ONLY" and payable locally where the Application is being submitted. Demand Draft charges, if any, shall be borne by the applicant.
   

OUR VIEW:

In our opinion though the interest rates offered by the IFCI looks attractive, its post-tax yields are not upto the mark. Moreover, the safety rating precludes us from giving a positive on this bond offering. Also, these bonds are not tax-efficient and involve a big ticket investment (minimum application of 100,000). Hence, you as investors would be better off in giving IFCI Tier II Subordinate Bonds a miss and wait for an opportunity that gives a better post-tax yield.

 

Currently interest rates are nearing their peaks, where we expect the debt market to line-up with better offering which may provide lucrative post-tax yields.

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Comments
ssy1718@126.com Jul 06, 2011 Finally! This is just what I was looking for.
manoharkantak@gmail.com Jun 26, 2011 There are many organisations coming up with NCD's and Bonds . These are signs of Bubble Burst stage. Everybody is on borrowing spree, credit rating agencies do not absorb any responsibility. These are all cyclic events and they do occur.

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