Tata Steel Perpetual Bonds are currently open for subscription; the offer will close on 18th July 2012, and at a minimum investment size of Rs. 11.42 lakhs, this will be out of reach for most people, but it is an interesting product and there aren’t that many perpetual bonds that are out in the market right now, so it might be a good idea to just learn about this for when another product comes in that’s within your range.
Perpetual bonds don’t have a maturity date which means that the issuer is not obligated to pay back the principal on the bond at a given date (like other bonds) as long as they continue to pay the interest on the bonds. This doesn’t mean that your principal is locked in forever because the bonds do trade on the stock exchange and you can sell them there. But this market is not liquid as far as I know and I wouldn’t feel very comfortable depending on that option if I foresaw the need for this principal ever. I’m explicitly making this point because of a comment that appeared in the Suggest a Topic section related to this.
Here is the comment.
I am aged 52 year old & had invested in different Insurance policies and deposits over a period of 10-12 years from my salary savings & reinvesting the same money on maturity is now approx amounting to 12 lacs when I surrender & with draw deposits from sweep in HDFC. Now I feel its to invest in a secured place where to invest at one place so as to get a benifit and Return on my investment for the total amout of rs 12 lacs.
M/S TATA STEEL Perpetual Bonds was suggested by my advisor at face value of 11.40 lacs on line through demat shall fetch Rs. 1,20,000 PER ANNUAM payable in Sept & March every on the same date & interest paid is taxable. Is it safe & OK please advise.
I think in this situation you are locking in a large part of your savings in just one instrument which doesn’t even have a maturity date and I don’t feel comfortable about that. That doesn’t mean it’s wrong, but you need to really understand that this investment may not liquidate that easily, and all your eggs are in one basket. Does the additional interest and it is not that much to begin with justify this?
The coupon on these bonds is 11.80% and the interest will be paid semi – annually, once on 18th March and then on 18th September. The yield however is lower than 11.80% at 10.25% because the face value of a bond is Rs. 10 lakhs whereas it is being sold at Rs. 11.42 lakhs in this offer.
While this yield is higher than what most bank fixed deposits give right now, it is not higher by a lot. There is a clause on the bonds that say if Tata Steel doesn’t redeem these bonds on 18 March 2021, then the coupon rate will be bumped up to 14.80% and that’s pretty significant, at least by today’s standards so they may just end up redeeming them in 2021.
The bonds are rated AA by CARE and AA by Brickworks so they are rated as quite safe assets. Like the NABARD bonds, I think there is limited utility in this but a good product to know about.