Corporate bonds turn extremely attractive for retail investors
Moneylife Digital Team 22 June 2011

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.

Comments
BRIJMOHAN ASAWA
9 years ago
TATA BONDS ARE UNSECURED BONDS
hemant kotak
1 decade ago
Rate of 11.40% Tata Power Perpetual Bonds as on September 30,2011
RAKESH SHAH
1 decade ago
WHAT IS U R OPINION ON sRHEE RAM TRANSPORT ON GOING NCD ISSUE
vipul shah
Replied to RAKESH SHAH comment 1 decade ago
Shree Ram Transport NCD Is good for invesment. Since it is on first come first basis and the issue size is also small chances of allottment would depend .Overall the response for this NCD is very good. I would recommend to apply for NCD upto Rs 5 lacs.
RAKESH SHAH
1 decade ago
HOW 2 BUY SUCH BONDS PLS REFER
vipul shah
Replied to RAKESH SHAH comment 1 decade ago
Bonds can be purchased from intermediaries who has bonds in his books or who can arrange for you .
vipul Shah
1 decade ago
Tata Power & Tata Steel are listed on Stock exchange and can be bought from a broker who is dealing into Debt market or can be purchased from person who has bonds in his portfolio.Retail or Senior citizen can buy this particular bonds in his /her portfolio. This bonds are in Demat form and coupon rate is paid half yearly.There is no transaction cost involved in it. The broker gives you a qoute for the bond at which it would be available to you and apart from that you have to pay accrued interest on the bond . eg: 11.40 % Tata power price currently is 101.40 Each bond has a face value of Rs 10 lacs so the rate per bond would be Rs 10,14,000/- plus accrued interest of Rs 7184/- ( 02-06-2011 to 25-06-2011 ). Total cost of the bond would be Rs 10,21,184/-.
Pradeep N
1 decade ago
Does any of the Bond Mutual Funds have these on their portfolio?
Udbhav Shah
1 decade ago
Could you let me know Where TATA power and Tata Steel perpetual bond is listed/traded? Can retail / senior citizen BUY? What charges/transaction cost will have to bear?
vipul shah
Replied to Udbhav Shah comment 1 decade ago
Tata Power & Tata Steel are listed on Stock exchange and can be bought from a broker who is dealing into Debt market or can be purchased from person who has bonds in his portfolio.Retail or Senior citizen can buy this particular bonds in his /her portfolio. This bonds are in Demat form and coupon rate is paid half yearly.There is no transaction cost involved in it. The broker gives you a qoute for the bond at which it would be available to you and apart from that you have to pay accrued interest on the bond . eg: 11.40 % Tata power price currently is 101.40 Each bond has a face value of Rs 10 lacs so the rate per bond would be Rs 10,14,000/- plus accrued interest of Rs 7184/- ( 02-06-2011 to 25-06-2011 ). Total cost of the bond would be Rs 10,21,184/-.
Nem Chandra
1 decade ago
Your statement of rate of bond @ Rs. 104/- in the following sentence is wrong-
"Tata Power issued a perpetual bond of 11.40% coupon which can be bought at Rs104 now, leading to an effective yield of 11.10%. Other such bonds"
MDT
Replied to Nem Chandra comment 1 decade ago
It has been corrected.
J Krishnamurthy
1 decade ago
When the higher interest rates of deposits and debentures are mentioned their respective long lock-in periods also should be mentioend equally prominently and very next to the rate. Otherwise, it may result in unintended cheating the gullible investor.
Take for instance the NCDs of Shriram Transport and a few others that your announcement above mention which pay inteest of over 12 % or so. Their lock-in periods are upwards of 6 to 7 years. Union Bank recently has come out with a 7 year deposit which they ssay give an annual yield of 13% plus. If that be so is not investment in Union Bank ( other such banks too) sounder and safer than in the deposits and debentures of companies who may or may not be able to return the principal or continue paying the interest promptly seven or eight years ahead. The case of Quasi-govt organisations is different.since they stand at par with banks. I am objecting only to investments in companies many of which have had a distasteful history in the past.
tushar chhaya
1 decade ago
There are no trades in the retail debt segment of most bonds mentioned in your report. These are traded only in the wholesale debt segment. For retail investors a few bonds are traded in the capital market segment of NSE suchas State Bank, Tata Capital, Shriram Transport. The yields are sub 10%.
vipul shah
Replied to tushar chhaya comment 1 decade ago
Bonds can be purchased from intermediaries who has bonds in his books or who can arrange for you . You can buy one bond also from the intermediary who arranges for you.
Moneylife Team
Replied to tushar chhaya comment 1 decade ago
"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."

"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. "
Vipul Shah
Replied to Moneylife Team comment 1 decade ago
Bonds can be purchased from intermediaries who has bonds in his books or who can arrange for you . You can buy one bond also from the intermediary who arranges for you.
Sundaram
1 decade ago
Can we purchase these Corporate bonds through trading portals like "icicidirect"?If not,how does an ordinary investor locate a broker who is willing to execute the trade?
vipul shah
Replied to Sundaram comment 1 decade ago
Bonds can be purchased from intermediaries who has bonds in his books or who can arrange for you . You can buy one bond also from the intermediary who arranges for you.
Sundaram
Replied to vipul shah comment 1 decade ago
Many thanks for your input,Mr.Vipul Shah.Could you please help me with the contact details of persons who can arrange for these debt transactions?My e-mail ID is "[email protected]".Thanks once again for your guidance and assistance.
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