ICICI Safety Bonds' August 2000 -- Selectively inspiring

Suresh Krishnamurthy

THE terms and conditions of the August tranche of safety bonds offer by ICICI have changed compared to the July offer in response to the altered conditions in debt market.

The ICICI has on offer three options: Tax Saving Bonds, Regular Income Bonds and Money Multiplier Bonds.

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Tax Saving Bonds: Options I and II offer tax savings under Section 88 of the IT Act. The yields on the instruments and the short maturity period make the instruments notably attractive. However, there is a caveat. Option II is a deep discount bond. These bonds are attractive only for the high networth investors since they attract the incidence of tax deduction at source if an investment is made in more than one bond.

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Investors need to consider this factor before investing. Another factor to note is that the limit for investment in the Tax Savings Bonds is Rs. 80,000 vis-a-vis Rs. 60,000 for other tax savings options. Alternately, investors can invest up to Rs. 60,000 in other schemes and opt for Tax Savings Bonds for an additional Rs. 20,000.

Option III and IV offer tax savings from capital gains under Section 54EA of the IT Act. Tax savings is available only for Capital assets sold in the period March 12-31, 2000. For sales before March 12 and after March 31, investments in the Tax Savings Bonds will not be eligilble for tax benefits.

Also, returns are attractive only if capital gains, as a proportion of investments, are more than 50 per cent. Also, investors who have capital gains on sales of long-term securities would be better off avoiding an investment unless capital gains, as a proportion of sales, is fairly higher than even 75 per cent. Again, option IV being a deep discount bond is attractive only for high networth investors.

Regular Income Bonds: The coupon rates on offer on all three options is the same as those on offer in the July. However, the redemption period has been brought down to four from five years. The effective yield for an investor, who does not reinvest his interest inflows as a consequence, has risen compared to the yields in the July offer.

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The lower redemption period has made the instruments comparatively more attractive compared to bank term deposits which also offer four-year investment programmes. However, while the tax treatment of interest income for both options is similar, the tax laws for deduction of tax at source is favourable for bank term deposits.

Traditional investors in bank term deposits can consider parking a portion of their funds in the Regular Income Bonds. However, investors need to consider that any investment in excess of Rs. 24,000 in option I would attract the incidence of tax deduction at source. For investors, especially retail investors, who are not uncomfortable with a longer maturity period but are seeking monthly incomes, the post-office monthly income option, which offers a significantly higher yield, may be a better investment option.

Money Multiplier Bonds: Of the four options on offer, the redemption period on three options are fairly high. As such, it may be of interest only to an investor who wants to set aside a portion of their funds anticipating specific needs.

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However, once again, the yield for a small investor can be significantly lower than what is indicated in the Table due to the incidence of tax deduction. In such a backdrop, options II, III and IV appear designed to attract high networth investors.

For a high networth investor, the options provide a chance to get locked into fairly high yields for a long period of time. Investors have to sacrifice liquidity instead. In contrast, the remaining invested in growth options of mutual fund debt schemes for such a long period of time has the potential to provide similar returns over the long-term with the added advantage of liquidity. The only difference is that while the indicated return on the bonds is certain, the return on mutual fund schemes is not certain. However, even considering this factor, it may be better for investors to opt for investment in debt schemes, giving more weightage to the liquidity factor.

In the case of option I, the return is exactly similar to that offered by Kisan Vikas Patra. However, KVP offers two other additional features: One, there is no tax deduction. Second, after the end of two-and-a-half years, there is a put option for investors every six months. Against this backdrop, investors can avoid the Money Multiplier Bonds.

Note: All applicants have the option to seek allotment in dematerialised form. All investors would be better-off exercising this option. The dematerialised debt market segment appears set to have a higher level of trading. Once it takes off, the liquidity in the secondary market is likely to improve considerably. As such, investors who have bonds in the dematerialised form would be in a position to take advantage of any such development.