The return of the 'Bond'

The retail bond/ debenture market was flourishing in the 90's with several top companies coming out with debentures in the form of Non convertible debentures (NCDs), Fully convertible debentures (FCDs) or Partly convertible debentures (PCDs). The non convertible portion was separately listed on the stock exchanges and there was a fair amount of trading in these debentures. But with the opening up of the economy, the companies had more options to raise debt in overseas market, leading to a virtual stagnation in the retail bond market.

 In Budget 2010, the government introduced a new section 80CCF under the income tax act to provide for income tax deductions for subscription in long-term Infrastructure Bonds. These bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE. Infrastructure bonds help in inter mediating the retail investor's savings into infrastructure sector directly.

Two issues of infrastructure bonds were recently launched to tap the retail segment: IDFC and L&T infrastructure bonds. These bonds offer an attractive option to fixed income investors looking for safety and tax saving. These bonds are expected to generate higher returns as compared to bank deposits and post office schemes. These bonds offer 7.5-8% annual returns, alogwith tax saving. These bonds may not appeal to investors in the lower tax bracket as they would be saving only 10.3% in taxes. However, investors in the highest tax bracket will be saving 30.9% on taxes which amounts to a decent Rs.6,180 savings on an investment of Rs.20,000. those with a long term perspective can choose to invest in these 10 year bonds, which have a lock in period of 5 years.The IDFC issue has closed while the L&T bond issue is open till 2nd November 2010. Even if you miss out on the issue this time there is no need to bother, there will be a spate of such issues towards the close of the financial year.

The salient features of the infrastructure bonds are listed below:

1.The bonds don't attract any TDS, however the interest receivable is subject to tax.

2.The interest accrued on the bonds will be credited to the respective bank registered with the demat account through ECS on the due date for interest payment.

3.The bonds will be listed on NSE and BSE and can be traded after the 5 year lock-in period.

4.Investors can mortgage or pledge these bonds to avail loans after the lock-in period.

5.An investor would need a demat account and pan card to invest in these bonds.(physical form is also allowed).

6.The bonds will be issued only to Resident Indian individuals (major) and HUF.

The Micro Finance Muddle

A spate of suicides in Andhra Pradesh, which accounts for over a third of the micro finance business in India, has seen the state government pass stringent regulations to control these institutions. The micro finance institutions (MFIs) have played an important role in fulfilling the credit requirements of the rural folk, who have limited access to organised bank finance even today. Most MFIs started as service oriented NGOs but have assumed a commercial role over a period of time.

While the Reserve Bank of India is eager to get credit to the poor and encourages banks to lend to microfinance institutions, it has not permitted them to raise deposits. Indian microfinance lenders generally charge between 24 percent and 36 percent annual interest. It is more or less on the lines of the interest rates charged by unorganised money lenders or the more sophisticated credit card companies. Banks have their own interest in extending credit to MFIs, to fulfill their agricultural lending targets.

Questions are now being raised about the functioning of MFIs. Some analysts also compare the MFI story to the sub prime crises in the US. RBI has also started an enquiry into the affairs of MFIs on a selective basis. There is definitely a need to regulate the MFIs, without killing the model that they adopt. The problem area could be multiple financing in certain pockets which could escalate into a bubble. But we must not forget that these institutions by and large enjoy an excellent recovery rate of 95-100%. The regulators will have to segregate the hay from the chef, rather than cast a shadow on the functioning of the entire MFI sector.