IDBI Flexibonds 9

Suresh Krishnamurthy

AFTER a relatively long period of hibernation during which the IDBI restricted itself to the private placement markets, it has now made an offer for retail investors.

The offer, IDBI Flexibonds 9, has four options for investors -- Regular Income Bond (2001A), Growing Interest Bond (2001A), Money Multiplier Bond (2001A) and Infrastructure (Tax Saving) Bond (2001A).

Regular Income Bond (2001A): The Regular Income Bond has two options for investors -- option A that offers interest annually and option B semi-annually. The unattractive feature of these options is the term-to-maturity, which is five years. In the case of any illiquid security such as a bond, being locked-in for five years does not appear to be a desirable aspect.

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In terms of yields too, the bond fares poorly. A comparable investment option, such as the Post Office Monthly Income Scheme, has better yields and offers more frequent interest payments. In addition, the risk involved in investing in the POMIS is considered less than investing in the IDBI Regular Income Bond.

The bond need not be considered as an option for portfolio diversification. Investors seeking to have a diversified portfolio (especially in institutional bonds) can opt for the Growing Interest Bond.

Growing Interest Bond (2001A): The Growing Interest Bond offers all investors (including those who have bought the bonds from the secondary market) an early encashment option at any time after the completion of one year from the deemed date of allotment, which is January 5, 2001. The bond does not have a call option.

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This feature offers liquidity and the penalty for the liquidity offered is also not high. Also, unlike earlier early encashment bonds, the facility is applicable to secondary market investors also, which facilitates liquidity in the secondary market for these bonds.

An unattractive feature of bonds in the Indian context, in general, is the lack of liquidity and this bonds seeks to provide an alternative option for investors. Also, given the concerns regarding investing for a longer period of five years -- which is the term-to-maturity of the instrument -- the anytime put option after one year is an attractive option and investors as such can consider parking their funds in this instrument. Also, considering the low level of Growing Interest Bonds carried by IDBI in its balance-sheet (approximately a little less than Rs 500 crore), this bond can be considered by investors seeking portfolio diversification.

To compensate for the early encashment option, the coupon rate for the annual interest payment increases each year till the year of maturity. If an investor exercises the early encashment option, the interest payable for the period between the earlier interest payment and the date of encashment will be the rate applicable for the previous year. Also, only original individual allottees can encash the bonds at specified branches of IDBI Bank. Others would have to despatch the certificates to IDBI's offices.

Money Multiplier Bond: IDBI's Money Multiplier Bond has a term-to-maturity of six years and four months. The money doubles in that period. Judging by these terms, the bond appears positioned as an alternative to Kisan Vikas Patra. An investment in KVP doubles in six years and six months.

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KVP, however, scores over the money multiplier bonds on three counts. One, the risk involved in KVP is lower than an investment in the IDBI Money Multiplier Bond. Two, the bond after the expiry of 30 months, offers put options for investors at the end of every six months hence. More important, investors would not be faced with the hassle of tax deduction at source as in the case of the Money Multiplier Bond.

In this backdrop, investors need not consider an investment in the Money Multiplier Bond. Also, since the term-to-maturity is long, an investment in KVP appears a more attractive proposition, which fares better on both the liquidity and risk front.

Infrastructure (Tax Saving) Bond (2001A): This bond offers investors tax rebate under Section 88 of the Income Tax Act. Investments in these bonds would qualify for the extra ceiling of Rs 20,000 available for investments in infrastructure bonds. The yield-to-maturity offered by this bond is attractive and so is the shorter term-to-maturity.

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Option B is a deep discount bond and would invite tax deduction at source if investments are made in more than one bond. As such, for investors in the tax bracket of below 20 per cent, option A is a more tax-efficient instrument.

Investors can consider investing in these bonds. However, they may want to take cognisance of a development on tax savings bonds front. Several infrastructure companies have approached the Government for taking the necessary approval to offer tax-saving instruments. If a few of these companies come out with an offer, investors would have more alternatives to choose from. These fresh offerings are likely to offer different yields and are also likely to figure differently in the risk scale.

Investors who would welcome such choices can avoid investing in this bond for now. If such options do not materialise, they would have the opportunity to invest in a fresh offer of ICICI and IDBI, which is most likely to be made before end-March 2001. However, while waiting for such choices, investors are taking risks and certain other circumstances could lead to such a strategy failing. Investors not comfortable with such a strategy can invest now in these bonds.

Note: IDBI offers investors the option of receiving the bonds in dematerialised form. In a few years, secondary market trading in dematerialised bonds may take off and, therefore, offer liquidity to bondholders who have the instruments in a dematerialised form. Investors as such would be better off getting their allotments in dematerialised form.

Terms and conditions

THE terms and conditions for IDBI Flexibonds 9 are the following:

* Full and firm allotment against all valid applications for the Tax Saving Bond. Subscribers to other bonds will be allotted only after allotment to Infrastructure (Tax Saving) Bond.

* A minimum of 50 per cent of the net offer of the bonds to the public shall be initially made available for allotment to individual applicants who have applied for less than 10 bonds.

* No early recall of bonds.

* In the case of the Growing Interest Bond, if an investor wishes for early encashment, he may apply to any of the IDBI offices or to the Registrar. This apart, the Original Individual Investors may submit the request at any of the specified branches of the IDBI Bank.

* Bonds are to be listed in the Stock Exchange, Mumbai and the National Stock Exchange.

* The market lot will be one bond.

* Interest on application money will be paid @ 4.5 per cent per annum on the amount allotted for the period commencing from the third day after the date of deposit of application form with the bankers to the issue, till a day prior to the deemed date of allotment.

* The CBDT has clarified that for the purposes of Section 88, investors would be allowed to obtain benefit under this Section with respect to the date of application to the extent of allotment made.

* The difference between the issue price and the face value of the Money Multiplier Bond in the nature of deep discount bond and Tax Saving Bond option II will be treated as interest income assessable under the Income-Tax Act.

* The interest paid on application money, interest on refund and interest bonds will be subject to deduction of tax at source at the rates prevailing from time to time, under the provisions of the IT Act or any statutory modification or re-enactment thereof.

* The interest paid on application money, interest on refund and interest on bonds will not be deducted at source from interest on application money and from interest on bonds if such interest does not exceed Rs 5,000 and Rs 2,500 respectively in any financial year.

Issue Type :Unsecured bonds

Issue size :Rs 300 crore

Greenshoe :Rs 300 crore

Listing :Mumbai, NSE

Offer opened :November 27

Offer closes :December 16