Reliance Industries (RIL) has raised Rs 200 crore by issuing preference shares to Housing Development Finance Corporation (HDFC). The instrument has a tenure of three years, offering a dividend yield of 6.9 per cent. This is possibly the lowest rate at which any corporate has raised three-year money.
A triple-A (AAA) rated company can raise three-year non convertible debenture at around 8.20 per cent. RIL recently raised five year money at 8.5-8.7 per cent.
HDFC has settled for such a low yield as it will not have to pay tax on this income and hence the real effective rate will work out much higher.
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According to Section 80(M) of the Income tax act, a corporate can net off its dividend income against its dividend payout and does not need to pay any tax on the dividend income if it can be squared off by the dividend outgo.
Any income over and above this, the corporate will have to pay a tax of 36.5 per cent which includes the corporate tax and the surcharge. Calculated at this rate, HDFC will get a yield of over 10.5 per cent. Preference shares were in vogue last year when dividend income was not taxable. However, with the imposition of dividend tax, corporates have been avoiding this route.
Also, the issuers are usually required to pay a higher dividend for a preference share issue as they are unsecured and unrated and considered to be more illiquid than NCDs.
RIL had a preference share capital of Rs 292.95 crore on March 31,2000. However on March 31, 2001 there were no preference shares in its balance sheet.
RIL has been in the debt market and is believed to have concluded a deal with Life Insurance Corporation of India, raising around Rs 300 crore. Reliance had had earlier mopped up Rs 200 crore from the market by privately placing two separate NCD issues of Rs 100 crore each, last month.
ICICI Bank was the sole subscriber to one of the issues. The NCD was of five-year maturity and carried a coupon of 8.65 per cent. The other issue had a maturity of 4 years and 10 months. The coupon of the bond was 8.70 per cent.
ABN Amro, the lead arranger of the issue, had initially taken the entire issue in its books and later placed Rs 75 crore with other banks.