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Informist, Tuesday, Dec. 3, 2024
 

--Fin min official: May approve more zero-coupon bond issuance by PSUs

--Fin min official: To OK zero-coupon bonds by PSUs based on mkt conditions

 

By Priyasmita Dutta and Sagar Sen

 

NEW DELHI – The finance ministry is likely to consider giving more public-sector lenders approval to raise funds through zero-coupon bonds that offer tax benefits to investors, a top finance ministry official said. The decision stems from the overwhelming response to the zero-coupon bonds issued recently by REC Ltd. These special bonds made a comeback in the corporate bond market after a 13-year hiatus.

 

"We (the government) cannot give arbitrary approvals. If one company has been given permission, others will also be considered," the official told Informist.

 

In October, REC raised INR 50 billion through a zero-coupon bond maturing in 2034. Non-interest-bearing bonds, or zero-coupon bonds as they are popularly known, sell at a discount and do not offer any periodic interest payment. REC's bonds also came with a special dispensation from the Central Board of Direct Taxes, allowing the return on these papers to be classified as capital gains rather than interest income, which gets taxed at a much higher rate. Given the advantageous tax treatment, the bond issuance garnered a strong response from investors, and was subscribed almost 10 times.

 

In the full Budget for the financial year 2024-25 (Apr-Mar), the long-term capital gains tax was revised to 12.5%. Earlier, the long-term capital gains tax on these assets was 20% but had indexation benefits, which adjusted for inflation. Had the income from the bonds been classified as interest income, it would have been taxed at the marginal tax rate. For institutional investors, this would be the corporate tax rate of about 25%, after cess and surcharges.

 

The last time REC issued similar bonds was in FY11. Thereafter, the government had done away with the concept of tax-free bonds. However, it is now open to approving more issuances of CBDT-notified zero coupon bonds on a case-by-case basis, the finance ministry official said. "One has to act based on market conditions. As and when more PSUs apply, the department will see," the official added.

 

The yield on REC's paper was over 60 basis points lower than on a 10-year government security, drawing major demand from long-term investors, ultra-high net worth individuals, and large corporations. Considering these bonds offer tax advantages to investors, companies need to take approval from the CBDT to issue such securities.

 

After REC's issuance, market participants have been anticipating that other public-sector entities will also explore this type of bond offering. In fact, REC is mulling the launch of a second round of the instrument to raise up to INR 50 billion -INR 100 billion, Chairman and Managing Director Vivek Kumar Dewangan told Informist last month.

 

National Bank for Agriculture and Rural Development is also "seriously considering" raising funds through this instrument, Chairman Shaji K.V. told Informist.  End

 

Edited by Rajeev Pai

 

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