 "Why inflation-indexed bonds don't sell")
Consumer Price Index-linked bonds have failed to make a mark among investors. One key factor responsible is the marketing of these products.
Distributors lack enough incentive for marketing these. They’d raised this point at a recent meeting of distributors, bankers and Reserve Bank of India (RBI) officials.
Currently, it is only the banks which earn a brokerage of one per cent of the subscription amount. The authorised banks are State Bank of India and its associate entities, nationalised banks and three private ones — HDFC Bank, ICICI Bank and Axis Bank. Investors can invest through these and the Stock Holding Corporation of India (SHCIL).
It has suggested they work out an arrangement with banks, in which the latter can share a part of the brokerage if investors get through them. However, no agreement has been arrived at so far. An email query to RBI remained unanswered.
“You need a bank account to buy these bonds. But that does not mean it is only the bank which will take the entire brokerage. If we are getting investors through our efforts, then even we need to be incentivised for it. We have not been doing any marketing of these bonds for this reason. The banks are also not doing much marketing of these products. Still, only they are entitled to brokerage,” said a distributor who attended the meeting.
According to some of them, they have conveyed this point to the finance ministry, too. “Banks do not have the required set-up to market these products. If you go to any bank, they will try to sell you insurance, mutual funds, etc. Have you come across one which tried to sell you these bonds?” asked a distributor.
RBI had launched the CPI-linked bonds under the name of Inflation-Indexed National Savings Securities-Cumulative (IINSS-C) in December. Initially the subscription was open till December 31, later extended to March 31; the Street said this was due to the poor response. Union Economic Affairs Secretary Arvind Mayaram said last week the bonds will be a part of the government borrowing for financial year 2014-15.
At banks, the internal operational guidelines for hawking these certificates at the branch level is still in the works.
The distributors made other suggestions to RBI. One was to raise the maximum limit for investment in these. RBI stated last Wednesday this had been raised to Rs 10 lakh per annum from the earlier Rs 5 lakh for eligible individuals and Rs 25 lakh per annum from the earlier Rs 5 lakh for Hindu Undivided Families (HUFs), charitable trusts, education endowments and similar non-profit entities.
The interest rate on these bonds comprise two parts — a fixed component (1.5 per cent per annum) and the inflation rate, based on CPI, compounded in the principal on a half-yearly basis and paid at the time of maturity. A suggestion was made that this 1.5 per cent per annum should be increased, as CPI inflation is softening.
Premature redemptions are allowed after one year from the date of issue for senior citizens (65 years and above) and three years for all others, subject to penalty charges at the rate of 50 per cent of the last coupon payable. It was suggested these be further reduced.
Transferability is allowed to the nominee(s) only for individual investors, on death of a holder; it is not allowed for other investors. A suggestion was made that this be allowed.
Besides, these bonds do not come within the list of deductions allowed under Section 80C of the income tax law, due to which the interest would be subject to the slab rate applicable for an investor. It was suggested this tax treatment be improved.
WHAT IS INFLATION-INDEXED NATIONAL SAVING SECURITIES-CUMULATIVE?
Distributors lack enough incentive for marketing these. They’d raised this point at a recent meeting of distributors, bankers and Reserve Bank of India (RBI) officials.
Currently, it is only the banks which earn a brokerage of one per cent of the subscription amount. The authorised banks are State Bank of India and its associate entities, nationalised banks and three private ones — HDFC Bank, ICICI Bank and Axis Bank. Investors can invest through these and the Stock Holding Corporation of India (SHCIL).
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The distributors have been asked to assist in marketing and selling but a brokerage structure has not been worked out yet for them. RBI has told these distributors that they only act as a merchant banker to the government, due to which it can’t decide on brokerage.
It has suggested they work out an arrangement with banks, in which the latter can share a part of the brokerage if investors get through them. However, no agreement has been arrived at so far. An email query to RBI remained unanswered.
“You need a bank account to buy these bonds. But that does not mean it is only the bank which will take the entire brokerage. If we are getting investors through our efforts, then even we need to be incentivised for it. We have not been doing any marketing of these bonds for this reason. The banks are also not doing much marketing of these products. Still, only they are entitled to brokerage,” said a distributor who attended the meeting.
According to some of them, they have conveyed this point to the finance ministry, too. “Banks do not have the required set-up to market these products. If you go to any bank, they will try to sell you insurance, mutual funds, etc. Have you come across one which tried to sell you these bonds?” asked a distributor.
RBI had launched the CPI-linked bonds under the name of Inflation-Indexed National Savings Securities-Cumulative (IINSS-C) in December. Initially the subscription was open till December 31, later extended to March 31; the Street said this was due to the poor response. Union Economic Affairs Secretary Arvind Mayaram said last week the bonds will be a part of the government borrowing for financial year 2014-15.
At banks, the internal operational guidelines for hawking these certificates at the branch level is still in the works.
The distributors made other suggestions to RBI. One was to raise the maximum limit for investment in these. RBI stated last Wednesday this had been raised to Rs 10 lakh per annum from the earlier Rs 5 lakh for eligible individuals and Rs 25 lakh per annum from the earlier Rs 5 lakh for Hindu Undivided Families (HUFs), charitable trusts, education endowments and similar non-profit entities.
The interest rate on these bonds comprise two parts — a fixed component (1.5 per cent per annum) and the inflation rate, based on CPI, compounded in the principal on a half-yearly basis and paid at the time of maturity. A suggestion was made that this 1.5 per cent per annum should be increased, as CPI inflation is softening.
Premature redemptions are allowed after one year from the date of issue for senior citizens (65 years and above) and three years for all others, subject to penalty charges at the rate of 50 per cent of the last coupon payable. It was suggested these be further reduced.
Transferability is allowed to the nominee(s) only for individual investors, on death of a holder; it is not allowed for other investors. A suggestion was made that this be allowed.
Besides, these bonds do not come within the list of deductions allowed under Section 80C of the income tax law, due to which the interest would be subject to the slab rate applicable for an investor. It was suggested this tax treatment be improved.
WHAT IS INFLATION-INDEXED NATIONAL SAVING SECURITIES-CUMULATIVE?
- Inflation rate is based on the final combined Consumer Price Index
- Only retail investors would be eligible to invest in these securities
- On redemption, investors will get principal and compounded interest
- Interest will be accrued and compounded in the principal on a half-yearly basis and paid along with principal at the time of redemption