Reaping rewards through bonus debentures

These offer additional income and great value for existing shareholders

After Blue Dart came up with a bonus debenture scheme late last year, NTPC, announced that existing shareholders  would be rewarded with bonus (read free) debentures.

According to the scheme document, the face value of each debenture will be Rs 12.50. The interest will be 50 basis point higher than the average government security (G-Sec) rate. For example, if the average G-Sec rate is 7.7 per cent, the debenture holder will get 8.2 per cent each year for the entire tenure, which is 10 years.



The investor will get the capital back in parts. The first tranche will be Rs 2.50 each debenture after eight years, then Rs 5 in the ninth year, and Rs 5 in the 10th year. Without an investment of a single rupee, the investor will earn interest  and receive capital from the company.

Sounds tempting? If an existing shareholder, it is additional income and of great value. But if you would need buy NTPC shares to benefit, the answer is not that simple. “For those who are not existing investors, it makes sense only if they believe the company stock is attractive at the current levels. The motive of the scheme is to reward existing shareholders,” says a stock market expert.

After the company announced the bonus December 23, there have been huge price movements in its shares. The same day, the company’s stock jumped 2.88 per cent compared to previous day’s close and closed at 142.8 a piece. Five trading sessions later it further went up to Rs 144.1 a share. On January 8, it touched a high of Rs 144.95 and is now trading at 139.10 a share.

“A company uses bonus debentures over dividends because the latter attracts dividend distribution tax. The interest that the company will pay can be claimed as expense, said Ajay Manglunia, head - fixed income at Edelweiss. This is also preferred compared to bonus shares, which dilute the equity of the company. “The borrowing cost also comes down for the company if it raises money via this instrument,” said Manglunia.

He also feels that this scheme is good for shareholders as it is very difficult for them to have a direct exposure to high grade papers from corporate like NTPC.

If you are unsure about buying NTPC shares or you first want to know the interest the company is offering, there could still be an opportunity for you.

To enable liquidity for investors, NTPC has said that these debentures will be listed on stock exchanges after the issue closes. You can buy from the exchange. When Blue Dart listed its papers, many mutual funds sold off the debentures for various reasons.

But before you buy, evaluate the returns and taxation on these debentures vis-a-vis other debt instruments like bank and company deposits. The interest component of these papers are clubbed with your income and taxed according to your slab.

If you get these debentures as bonus because you are a shareholder, the capital you get in the eight, ninth and tenth year will attract long term capital gains as they are listed securities. If you buy it from the exchange and hold it until maturity, there won’t be any tax on the capital deployed.