This is another post from the Suggest a Topic page, and today we’re going to review the recently launched IFCI Tier II Bonds. When I first heard of them I wondered if they had released another tranche of infrastructure bonds for this year, but that’s not the case.
These IFCI bonds don’t offer any tax benefits, and are like the SBI bonds that were issued earlier this year. They have a relatively longer time frame for maturity; will be offered in Demat form, and will trade on BSE thereafter.
I wasn’t able to download the prospectus of the IFCI bonds, so I won’t be able to get into as much detail as I went into with other bond reviews, and will focus on the information available on their website, with some thoughts on them.
The first thing that caught my eye was how high the bar was set on investing in these bonds. The minimum investment is set at Rs. 1 lakh, and that’s a fairly big amount for a retail investor to commit on just one bond issue. I don’t know why they would want to keep the limit so high, and I can only think that they don’t want to have a very large number of investors and feel confident that they will be able to raise funds even with such a high minimum investment amount.
This is aÂ subordinated Tier II unsecured debt issue, and from what I understand these bondholders are the lowest in creditor hierarchy and will be wiped out before all other creditors of the company. This will of course only come in play in dire circumstances, but since there are banks that offer interest rates close to the ones offered by this IFCI bond issue, I don’t see any merit in allocating more than say 5% of your capital in just this issue.
Here are some other important details about the IFCI bond issue.
Open and Close Date of the IFCI Bond Issue
The bond issue opened on June 1 2011, and will close on the July 15 2011.
Minimum Investment and Denomination
The minimum investment needed is Rs. 1 lacs, and one bond is worth Rs. 10,000. Since the bonds will list on BSE shortly after they’re issued, you will be able to buy one bond for Rs. 10,000 from BSE. However, it is quite likely that the bonds trade at a premium at that time, so you will probably have to pay a premium while buying these bonds from BSE.
Interest Rates and Series of IFCI Tier II Bonds
You have 4 options when it comes to these bonds – you can choose the 10 year or the 15 year maturity period, and then within that you can decide whether you want the interest paid to you annually or you want it to accumulate and get it all at the end.
The two series have call options from IFCI – the 10 year one can be called at the end of 7 years, and the 15 year one can be called at the end of 10 years.
What this translates into is that if you chose to take the 10 year bond, and at the end of 7 years IFCI decided that they want to redeem the bonds – they will repay you the money, and not have to wait 3 more years for maturity. Same thing with the 15 year bond.
Since the bonds are traded on the stock exchange – you can sell them at any time at market prices, but there’s no guarantee what the market price will be.
Listing Gains on the IFCI Bond
Some of you will be curious as to what price will the bond list on, and if there’s any opportunity to make listing gains, and make a fast buck on them.
I have absolutely no idea how they’re going to list, and the only input I can offer here is that the SBI issue listed at about a 5% premium. (I have fairly strong views on this topic which can be found here)
How does this issue compare to fixed deposits?
As far as I know – there’s no bank that allows you to lock on to a 10.75% interest rate for 15 years, or even a 10.50% for 10 years.
Karur Vysya is currently giving 10.00% for 1 – 2 years deposit, but as the time frame goes up the interest rate goes down. There must be a few other banks around that range, but I don’t think anyone is promising you this interest rate for such a long period. On the other hand, IFCI’s unsecured Tier II debt, is riskier than a bank fixed deposit.
Plus, the minimum amount will take it out of reach of a lot of retail investors, and this is probably just the beginning of many more bond issues from other companies as well.
Ultimately, you have to see if this fits into your asset allocation and doesn’t expose you too much to just this one asset. Also, think if it makes sense for you to wait for it to list, and then buy it from the secondary market. That way you can invest a smaller amount, but may have to a pay a premium for it.
As always, your comments are welcome, and much appreciated!
69 thoughts on “IFCI Bonds: Tier II Bonds Review”
Thanks for your reply Manshu.
With QE3 in line, do you really expect interest rates to come down?
Many foreign experts suggesting that mega inflation has just begun and it will last atleast a decade. As inflation is loved by politicians as it is a stealth tax on citizens and it helps in hidden default on the govt debt. (as what they are paying after 10 or 15 year govt security on maturity has actually less value than the original amount due to high inflation)!
For example, what mr x invested in nsc or kvp will have lesser real value at maturity due to high inflation.
Further, now the difference in ifci issue price and market price is Rs 200 on minus side.
Yes Sahil – I do – maybe not so soon, but we have already started seeing company’s profitability hurt with the current rate hikes, and if conditions further deteriorate then RBI has a lot of room to cut rates, and I don’t think they will hesitate to do so.
What happened to all those FII ready to buy these bonds?
These bonds are trading at a huge discount of Rs 400!!!!!!!!!
whats the way out now? i invested about 20 bonds. should have taken them from the market at current level.
You can wait out for some time in my opinion, the interest rates are bound to come down, and then you can sell them. No point in selling them at a loss now.