If you want to invest Rs10 lakh and above in a fixed-income product, consider listed corporate bonds. Some safe ones can yield returns as high as 12%
With interest rates shooting up, bank fixed deposits are attractive now. For the more adventurous, there are corporate fixed deposits, about which we had written last week, on 14th June, (Corporate fixed deposits offer higher rates than banks. But is it safe and smart to go for them?).
But if you have an investment plan of Rs10 lakh or more in fixed income, corporate bonds are also a great option for you. Many of the new bonds even offer you a higher rate of interest as compared to fixed deposits, postal savings or similar investments. Some bonds floated by the Tata group currently yield more than 11% per annum. Many of these bonds are listed on the BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange) and can be bought through stockbrokers who have a presence in the debt segment, who immediately transfer them into your demat account.
Since these instruments are listed, you need not be stuck with them; you can sell them in the secondary market before maturity. The bonds that are currently worth buying are: IRFC 12.90% 2012 (S-15M) from the Indian Railway Finance Corporation earning around 13%; CitiFinancial Consumer 9.48%, 2013 (Series-320) yielding around 12%; PGC 6.10% 2010 S-XIV STRPP-H from Power Grid Corporation of India earning around 12% and IDBI 8.90% 2017(IDBI Omni Bonds yielding around 11%). Then there are higher-yield bonds from builders which are riskier—Vijay Associates Wadhwa Cons 16% 2013 (Sr-B) from Vijay Associates (Wadhwa) Construction Private Limited yielding 16%.
You can download the details of the listed bonds from the NSE website at http://nseindia.com/.
Unfortunately, there is very little awareness of these bonds and their products among retail investors and so they miss out on the opportunity. Corporate bonds are issued by corporations in need of capital for their regular operations and also for projects. Most corporate bonds offer semi-annual fixed-rate coupon payments. Others offer floating coupons. When a company decides to sell bonds to raise capital, it negotiates deals with investment bankers and large institutional investors to place those bonds in the market.
After that, the bonds are listed on the secondary market. This market is open to all investors, but caution is warranted. The secondary market is almost entirely an over-the-counter market. Most trades are conducted on closed, proprietary bond-trading systems or via the telephone.
The only way the average investor can participate is through a broker who would be willing to locate small lots and sell them to him. More importantly, the pricing of bonds on the secondary market can be difficult to track and understand.
Follow the yield-to-maturity (YTM) figure which is available on the NSE website. One way to invest in corporate bonds is through off-market purchases. Take an example where an institution has Rs1 crore worth of bonds while you want to buy Rs20 lakh worth of bonds. You can approach the broker, negotiate the purchase price, pay via cheque and the bonds get transferred to your demat account.
Corporate bonds are mainly secured—backed by assets of the issuing company. Theoretically, they do carry an inherent risk of default, though it is hard to see that Tata Power of TISCO would default suddenly. Companies move slowly towards default following significant deterioration of their finances, over a long period due to adverse fundamentals, competition, and poor or unethical management practices. Bondholders will get plenty of time to exit when the deterioration is palpable.
Another form of corporate bond issuance that is now becoming popular is perpetual bonds. These have been issued by Tata Power and Tata Steel. Perpetual bonds pay interest forever. They are never redeemed and so have the characteristic of equity shares with a fixed dividend. This instrument made its entry into the financial markets in 2005. The issuers of perpetual bonds are primarily scheduled commercial banks. In January 2006, RBI allowed banks to shore up their capital through issuance of perpetual bonds and another instrument called 'Upper Tier-II Bonds'. In March this year, Tata Steel was the first private sector company to have issued perpetual bonds.
The unique features of these securities are that they are perpetual in nature with no maturity or redemption and can be called only at the option of the company. They are not redeemed, unless the issuer wishes so, after a few years. Perpetual bonds give the issuer access to long-term capital and it is mostly insurance companies and pension funds which subscribe to these bonds. For instance, the Tata Power offering is for a period of 60 years with a call option of 5 years.
Some of the perpetual bonds yielding more than 10% include: Tata Steel RESET Perpetual from Tata Steel having a coupon rate of 11.50%. Interestingly, if Tata Steel does not call the bonds after 10 years from the date of allotment, the rate of distribution would be revised upwards by 300 bps (basis points) i.e., to 14.50% per annum payable semi-annually. Tata Power issued a perpetual bond of 11.40% coupon which can be bought at Rs104 now, leading to an effective yield of 10.96%. Other such bonds have been issued by Punjab National Bank, Oriental Bank (yield of around 10.50%) and State Bank of Travancore which offers yield of around 10%. Shriram Transport has also announced plans to raise money through 11.50% bonds.
With an IPO grading of just 1/5, the stock ends at a premium 44.76% on debut
Timbor Home, which opened its innings on the bourses today, emerged as the top gainer on the National Stock Exchange (NSE), closing at Rs91.50 compared to its issue price of Rs63, a premium of 44.76% to its issue price. Opening at Rs72, the stock traded in the range of Rs72-Rs99 intra-day. The total volume of shares traded on the NSE and the Bombay Stock Exchange was 7.91 crore which is 5.38 times the issued equity shares of the company.
Timbor Home, manufacturer and retailer in the modular kitchen industry, had set the issue price of its initial public offer (IPO) at Rs63, the upper end of the price band of Rs54-Rs63. The issue was subscribed 5.78 times. The Qualified Institutional Buyers (QIBs) category was subscribed 65%, while the non-institutional investors' category was subscribed 3.22 times and the retail investors' category was subscribed 14.22 times. Interestingly, the company has such poor fundamentals that it got an IPO grading of 1/5.
The issue is equivalent to 25% of the company's post-IPO equity and will lead to the promoter's holding falling to around 50%. Other private investors hold the remaining 25% shareholding in the company.
The company raised Rs23.25 crore through the issue of 36.9 lakh equity shares. Of the total issue proceeds, the company will use Rs2.6 crore for capacity expansion, Rs4 crore for establishment of stores, Rs13.2 crore for working capital requirement and the remaining amount for other corporate purposes.
Analysts had suggested ignoring the issue on account of the company's aggressive valuations and weak financials.
Timbor Home operates as a manufacturer and retailer, having 80 stores of kitchen, door and furniture. It also operates on a franchise model. Competitors in the segment include Pantaloon, Shoppers Stop, Trent, Godrej, Durian and Lifestyle.
The company's net sales in FY09-10 was Rs51 crore. Apparently, it grew at a compounded annual growth rate of 65% in the last four years. During the same period, the company's net profit has grown to Rs1.8 crore from just Rs10 lakh. The company has very thin margins. The operating margin in FY09-10 was 10.7% and net profit margin was 3.5%.
A couple of activists have spearheaded a campaign to make it more convenient for Indians living abroad to use the RTI Act. One of the issues is providing an online facility to make relevant payments on RTI applications. But their efforts have met with indifference by the government
Thousands of Indians reside in other countries where they are employed, engaged in business, or for studies. Many more travel to other countries for shorter periods as visitors. Despite the distance, they stay connected not only with their families back home, but with the issues in India. Many of them have a desire to actively participate in India's governance.
Ever since the implementation of the Right to Information (RTI) Act in 2005, their hopes to access information and keep a tab on governance had brightened. But six years down the line, they are still pleading with the Indian government to make the payment of fees applicable under the RTI Act, payable online, from the country where they reside and in the relevant currency. For this, they are seeking the purchase of postal order online, which is the most popular mode of payment under the RTI Act, towards payment of fees. This would facilitate sending their RTI application directly to the Public Information Officer (PIO) of any government department in India.
There is a flicker of hope. According to a document procured by Commodore (Retd.) Lokesh Batra, the Department of Posts has written to the Reserve Bank of India (RBI) on 4 February 2011, stating that, "The Department of Posts has developed a portal called 'e-portal' office. We have received a reference from the secretary, Department of Personnel and Training, requesting to include a provision for the purchase of Indian postal orders by Indian citizens living abroad, to enable them to seek information under the RTI Act, 2005. The challenge faced by the Indian citizens is in remitting the prescribed fee for seeking information as per the specified mode of the Act. The post office can provide a solution to this challenge, since the Indian postal order is one of the most prescribed mode of payment under the RTI Act. To put a system in place to facilitate this, we would require clearance to accept credit card/debit card for online payment from abroad through e-portal.''
Further, RTI documents reveal that the Department of Posts has also written to the RBI on 15 March 2011 stating that Axis Bank has been accepted as the "payment gateway provider'' for such online payments.
However, the RBI in its reply on 15 June 2011 to Commodore Batra's RTI query on the status of letters from the Department of Posts, has said, quite ridiculously, "The RBI has not taken a final decision on the request of the Department of Posts. As such this information cannot be given as per Section 8 of the RTI Act.''
Commodore Batra, who resides in Noida, has filed 50 RTI applications since 2008, seeking information on action taken by different government departments, whether it is the Ministry of Finance, the Department of Personnel and Training (which implements the RTI Act), the Department of Posts (which can make e- payment possible), the National Advisory Council (NAC) and the Prime Minister's Office (PMO).
Indians living in the United States have taken up the RTI campaign since 2007. Vishal Kudchadkar, member of the Association for India's Development (AID), which has undertaken a crusade against corruption and is working on various developmental issues, says, "Even after six years, Indian citizens living abroad are unable to access information, as per their right, in the absence of procedures/rules to be framed by the government for payment of RTI fees in foreign currency from abroad. Each time I have to depend on my friends in India to pay fees for my RTI applications and appeals.''
Mr Kudchadkar, who is based in Los Angeles, has invoked the RTI Act on several issues. One of these was to the Maharashtra home ministry seeking information on the establishment of Police Personnel Board, Police Grievance Authority and State Security Board, post 9/11 Mumbai terror attack. He has also filed RTI applications on the Bhopal gas tragedy, the civil strife in Nandigram and similar SEZ issues.
Commodore Batra, who is steering the campaign for Indians abroad, plunged into the matter during a visit to the US in 2008. The date for his appeal before the Information Commission in Delhi was fixed while he was abroad, and then chief information commissioner, Dr Wajahat Habibullah, allowed the hearing through audio-conferencing. However, when he began to ask about regular RTI applications filed from the US, he found that Indians there faced many hurdles.
The Indian embassy in Washington put its hands up, saying that it could only accept RTI applications pertaining to queries related to its office, or at the most those related to the Ministry of External Affairs. The Indians tried to impress upon the embassy that under Section 6(3) it is the duty of the PIO to forward applications not relevant to him, to the concerned departments. But the embassy refused to take responsibility.
Commodore Batra says, "The denial of the use of the RTI Act applies to all Indian citizens living abroad, including those who may be abroad for short visits, for education and for jobs or business, even officials posted in Indian missions or on deputation to international bodies, and so on.''
So, he addressed RTI queries to various ministries concerned with this issue, like the Ministry of Overseas Indian Affairs (MOIA), Ministry of External Affairs (MEA), Department of Personnel and Training (DoPT) the PMO and the NAC, as to what action had been taken to facilitate Indians abroad to use the RTI Act and to make it easy for them to pay the fees online, but there was no reply. Commodore Batra also sought to know the status of the petition sent by Indians living abroad and wrote to prime minister Manmohan Singh to intervene in the issue.
Commodore Batra then filed a complaint with the Central Information Commission (CIC) in April 2009 against the ministries for not providing him the required information. Information commissioner Annapurna Dixit gave an order on 16 April 2010 asking the Department of Personnel and Training to "formulate" a system to "facilitate accessibility of the Act by Indians abroad".
Simultaneously, Indians abroad launched an online global campaign in April 2010 addressing an "Appeal to Prime Minister Manmohan Singh" to "intervene to speedily resolve the problem". The petition carried signatures of 316 Indians residing in Australia, Burundi, Canada, Dubai, Ethiopia, France, Germany, Holland, Japan, Kuwait, Maldives, New Zealand, Singapore, South Korea, Sweden, Switzerland, South Africa, UAE, the UK and the US.
On 17 May 2010, a delegation of US-based Indian activists submitted the petition to the prime minister through the nominated representative of Meera Shankar, then Indian ambassador in Washington, requesting him to forward the submission to the prime minister.
The petition said: "Our suggestion is that just as the government has facilitated APIOs by the postal department in India for all public authorities, along similar lines, the government should facilitate an APIO in each Indian Mission/Post in local embassies and charge fees equivalent to rupees.
"Alternatively, we suggest that arrangements may be made by the MEA, the administrative ministry for Indians abroad, for missions to accept RTI fees in foreign currency from applicants filing RTI to central public authorities, using the same procedure as they are hitherto doing for RTI applications concerning their own ministry. The mission's role would be to accept the fee along with a copy of passport to verify citizenship and issue a receipt/E-receipt to the applicant for the fee. Thereafter, either the mission or the RTI applicant can forward the application to the concerned central public authority (PA) online… Any additional costs for providing the information can be remitted to the mission in the same way and the receipt/E-receipt given by the mission can serve as proof of payment.''
The Prime Minister's Office has been silent on the issue.
Commodore Batra though has not given up. He feels victory is round the corner. "I am going to file an appeal against the reply of the Public Information Officer of the Reserve Bank of India which says that it comes under Section 8 of the RTI Act, meaning information cannot be disclosed. I would also be conducting inspection of files in the Ministry of Finance department," he says.
(Vinita Deshmukh is a senior editor, author and convener of Pune Metro Jagruti Abhiyaan. She can be reached at [email protected].)