Ambiguity over a clause in the Companies Act that disallows corporates from investing in tax-free bonds at a rate of interest lower than the prevailing bank rate was seen as hurting investments into tax-free bonds
The ministry of corporate affairs (MCA) on Thursday said companies can invest in tax-free bonds where the effective rates are higher than the prevailing bank rates, a move that would help in attracting more investments into such instruments.
Ambiguity over a clause in the Companies Act that disallows corporates from investing in tax-free bonds at a rate of interest lower than the prevailing bank rate was seen as hurting investments into tax-free bonds.
Making the clarification, the ministry has said corporate investments in tax-free bonds having higher interest rates (effective rate of returns) than prevailing rates would not violate the Companies Act.
“...where the effective yield (effective rate of return) on tax free bonds is greater than the yield on prevailing bank rate, there is no violation of Section 372(A) of Companies Act, 1956," the ministry said in a circular dated 14th March.
The circular is effective from 14th March.
A clarification on the issue was sought by the finance ministry in order to effectively implement the Budget proposals.
In the Union Budget for 2013-14, the government authorised raising of up to Rs50,000 crore through issue of tax-free bonds.
As per the Companies Act, “no loan to anybody corporates shall be made at a rate of interest lower than the prevailing bank rate, being standard rate made public under Section 49 of the Reserve Bank of India Act...”
Such bonds carry a lower rate of interest—at present in the range of 6.75% to 7.50%. These instruments are also allowed in the current financial year but the response has been relatively poor.
According to the circular, the poor response was mainly on account of the restriction in terms of Companies Act—where tax free bonds cannot have rates higher than the prevailing interest rate.
Investors cannot start with an assumption that every mutual fund scheme that they intend to invest in can beat inflation. Portraying mutual fund as a product capable of beating inflation to gullible investors is unfair
Have you seen the advertisment campaign that Association of Mutual Funds of India (AMFI) is running these days to promote mutual funds? If not, it is time to watch it now. AMFI is promoting mutual funds as, “Savings ka naya tareeka” and “Inflation ka injection”. The idea behind the advertisement is to pitch mutual funds as a savings product to first time investors. The main protagonist in the advertisement says that, “Mutual fund ko injection bhee kah sakte hain, inflation ka injection. Zara sa chubhega, lekin salo tak mahgaee ki bimari se ladgea” (“Mutual fund can also be termed as injection against inflation. It will fight inflation for years”). It is important to note that this advertisement is being promoted by an association which claims that it is meant to serve some of the objectives which are as follows:
Now let us analyse to what extent AMFI has been able to achieve these objectives. The AMFI website states that one of the objectives with which it is functioning is to disseminate information on the mutual fund industry. If that is the objective of AMFI, is it right in promoting mutual fund as a product for savings rather than a product meant for investments? It is expected that a so-called professional body like AMFI must be having understanding of the difference between savings and investments, which is available on a simple google search. One of the simplest segregation between savings and investments can be described as follows, “Saving represents money that is supposed to be immediately liquid and safe.
Investing is for money that is supposed to be generating more money”. It is obvious that a mutual fund is not a savings product and hence promoting it as, “savings ka naya tareeka” is misleading. It is important to note that one of the key objectives of a mutual fund is to convert savings into investments.
AMFI talks about setting high professional and ethical standards in the mutual fund industry but is AMFI, itself, following those standards? AMFI acting on the behalf of mutual funds should not promote the product which is taking care of the interest of mutual fund houses and seems to be misleading retail investors. The advertisement by AMFI promotes mutual funds as an injection to protect against inflation. Mutual fund is a great investment product, no doubt, but whether it can beat inflation is really debatable. Aren’t there several mutual fund schemes which have given negative returns consistently over the years? Only well managed funds are capable of beating mutual funds. Investors cannot start with an assumption that every mutual fund scheme that they intend to invest in can beat inflation. Portraying mutual fund as a product capable of beating inflation to gullible investors is unfair. If mutual funds can act as an injection against inflation, what is the need to introduce an inflation index bond which is being introduced as a product to fight inflation? AMFI should impress upon the RBI (Reserve Bank of India) and the ministry of finance to drop the idea of introducing inflation index bonds, as we have an effective tool to fight inflation.
I wrote on this to AMFI which has remained unanswered till date. However HN Sinor, chief executive at AMFI, told Business Standard, “This is a decision taken at the board level of AMFI, where it has representation from its members. The board’s decision represents the consensus among members. There could be individuals who do not agree but I cannot take 100% consensus of the members. Some people like something and others may have a separate opinion on the same.” The question of like and dislike does not arise in the case of a product, which is being wrongly pitched. It important to note that mutual fund as a product has not taken off as an investment product in spite of repeated efforts. Any misrepresentation of facts with respect to mutual funds can prove to be fatal for the product.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
The cable distributor along with 24 other entities including its CMD Sameer Manchanda and Network18 founder Raghav Bahl paid Rs4.93 crore to SEBI for settling various alleged violations committed by Den Networks during its IPO