DEBENTURES I. Sale/Transfer of Shares/Bonds/Debentures by NRIs to Residents In order to facilitate quick transfer of shares/bonds/debentures held by NRIs to residents, Reserve Bank has granted general exemptions for sale/transfer of shares/bonds/debentures through stock exchanges in India subject to fulfillment of certain conditions. Applications for sale/transfer of shares/bonds/debentures held by NRIs/OCBs by private arrangement i. e. ther than through stock exchange should be made to Reserve Bank in TS 1 either by the transferor or the transferee, attaching therewith the letter of consent of the other party irrespective of whether the shares/bonds/debentures are listed on a stock exchange or not. While conveying its approval, Reserve Bank will stipulate the conditions subject to which the sale/transfer should be effected. In case of sale/transfer of shares/bonds/debentures acquired on repatriation basis, repatriation of such proceeds of bulk holding (i. . shares/bonds/debentures exceeding Rupee one lakh in face value or 5% of the company’s paidnup capital whichever is lower) will be permittted only on production of a certificate from a Chartered Accountant or the concerned company’s secretary stating that shares with necessary transfer form duly signed have been received/lodged with the company for registration in favour of the transferee. II. Sale/Transfer of Shares/Bonds/ Debentures of Indian companies through a Stock Exchange acquired without repatriation benefit.
Reserve Bank has exempted the transfer of shares, bonds or debentures of Indian companies made by NRIs through stock exchange in India in case where (a) such transfers are made in favour of an Indian citizen or person of Indian origin resident in India or in favour of a company or other body corporate incorporated in India and (b) sale proceeds of shares are credited to the NRO account of the transferor with no right of repatriation outside India.
In such cases, authorised dealers may credit the sale proceeds to the seller’s NRO account after verifying the contract notes issued by recognised stock exchange brokers through whom the sale was effected. This exemption is available in respect of shares, bonds, or debentures acquired by NRIs under the Portfolio Investment Scheme as well as under any Direct Investment Scheme. ii) For sale/transfer of shares, bonds or debentures by OCBs acquired on non-repatriation basis through a stock exchange in India, a consolidated application giving full particulars may be submitted to the concerned office of Reserve Bank. Permission will be granted by Reserve Bank for a specific period subject to renewal. III. Sale/Transfer of shares/Bonds/ Debentures of Indian companies through a Stock Exchange acquired without repatriation benefits under the Portfolio Investment Scheme.
Reserve Bank exempted transfer of shares, bonds, or debentures of Indian companies registered in India previously acquired by NRIs/OCBs with repatriation benefits under the Portfolio Investment Scheme to person residents in India or persons of Indian origin resident in India or in favour of companies or bodies corporate, incorporated under any lay in force in India on the following conditions: (a)The transferor had purchased such shares, bonds or debentures from the stock market through a member of a recognised stock exchange in India and delivery of shares, bonds, or debentures so purchased has been taken by him or on his behalf by the concerned authorised dealers or its nominee. (b) The shares, bonds or debentures are sold in the stock market through member of a recognised stock exchange in India and sale transaction is effected at the ruling market price as determined on the floor of the stock exchange by normal bid and offer method and through the same designated branch of the authorised dealer through which the shares, bonds or debentures were earlier purchased. (c) The sale proceeds are paid to the said designated branch. Consequently, it is not necessary for NRIs/OCBs to obtain Reserve Banks’ permission for sale of shares/bonds/debentures effected in the above manner.
As regards the repatriation of sale proceeds received by the designated branches, Reserve Bank, will while granting approval for purchase of shares/bonds/debentures, also grant approval for repatriation of the sale proceeds if and when the shares/bonds/debentures are sold in the above manner. The actual repatriation of the same proceeds or credit thereof to the NRE/FCNR account of the beneficiary will be subject to payment of Indian taxes. IV. Sale/transfer of shares/bonds/debentures acquired by NRIs/OCBs with repatriation benefit under the Direct Investment Scheme Sale/transfer of shares/bonds/debentures acquired by NRIs/OCBs with repatriation benefit under the Direct Investment Scheme and sold through the Stock Exchange in India will require permission of Reserve Bank.
Applications for necessary permission should be made by NRIs/OCBs to the Central Office of Reserve Bank in Form TS 4 through the designated bank branch of an authorised dealer. In such cases, permission for sale/transfer of shares/bonds/debentures acquired with the right of repatriation will be granted by Reserve Bank to the branch designated by the seller to the authorised dealer, as the case may be, who may sell the holdings at the ruling market price, through a stock exchange at any time within the validity of the permission. While granting permission for sale/transfer, Reserve Bank will also authorise the designated branch/authorised dealer to credit the sale proceeds to the NRE or FCNR account of the seller or to remit them abroad subject to payment of taxes on capital gain if any.
Where the amount of capital gains taxed is not immediately determinable, the designated branch/authorised dealer may allow repatriation of sale proceeds or credit thereof to he sellers NRS/FCNR account to the extent of the original cost of investment immediately on realisation of the sale proceeds. The excess amount, if any representing capital gain should be kept by the designated branch/authorised dealer in a separate NRO account of the seller or in a suspense account. The designated branch/authorised dealer may allow withdrawal of this amount for credit to the NRE/FCNR account of the seller or remit it abroad, on production of necessary tax clearance certificate. V. Transfer of Rupee Securities by Non-residents as Gift
Reserve Bank has also exempted transfer, by way of gift, of any share, bond or debentures of company registered in India made by a non-resident Indian or person of Indian origin to a citizen of India or a person of Indian origin resident in India provided: (a) such shares, bond or debenture was held by the transferor with the permission of the Reserve Bank, and (b) such transfer is between relatives as defined in Section 6 of the Companies Act, 1956 Consequently, it is not necessary for NRIs to obtain Reserve Banks’ permission for transfer of shares/bonds/debentures effected in the above manner VI. Transfer of Rupee Securities to Non-residents as Gifts Transfer of rupees shares/securities by residents to non-residents by way of gift requires prior approval of Reserve Bank.
Applications for such transfers should be made to the concerned office of Reserve Bank and should, inter alia, containing the following information: (a) Name, address and permanent place of residence of both the transferor and the transferee. (b) Relationship between the transfer or and the transferee. Reason for making the gift VII. Sale/Transfer of Government Securities/Units NRIs/OCBs may freely sell/transfer Government securities through a Stock Exchange in India, provided the sale/transfer of such securities is arranged through an authorised dealer. Similarly NRIs/OCBs holding units of UTI may freely tender them for repurchase by the Trust. A debenture is an unsecured loan you offer to a company. The company does not give any collateral for the debenture, but pays a higher rate of interest to its creditors.
In case of bankruptcy or financial difficulties, the debenture holders are paid later than bondholders. Debentures are different from stocks and bonds, although all three are types of investment. Below are descriptions of the different types of investment options for small investors and entrepreneurs. Debentures and Shares When you buy shares, you become one of the owners of the company. Your fortunes rise and fall with that of the company. If the stocks of the company soar in value, your investment pays off high dividends, but if the shares decrease in value, the investments are low paying. The higher the risk you take, the higher the rewards you get.
Debentures are more secure than shares, in the sense that you are guaranteed payments with high interest rates. The company pays you interest on the money you lend it until the maturity period, after which, whatever you invested in the company is paid back to you. The interest is the profit you make from debentures. While shares are for those who like to take risks for the sake of high returns, debentures are for people who want a safe and secure income. A Debenture is a long-term Debt Instrument, which is not backed by Collaterals. Debentures are unsecured debt backed by the creditworthiness and reputation of the Debenture issuer and documented by an agreement called an indenture.
It is issued usually by large, financially strong companies with excellent bond ratings. One example of debenture is an unsecured bond. A Debenture is a long-term Debt Instrument issued by governments and big institutions for the purpose of raising funds. The Debenture has some similarities with Bonds but the terms and conditions of securitization of Debentures are different from that of a Bond. A Debenture is regarded as an unsecuredinvestment because there are no pledges (guarantee) or liens available on particular assets. Nonetheless, a Debenture is backed by all the assetswhich have not been pledged otherwise. Normally, Debentures are referred to as freely negotiable Debt Instruments.
The Debenture holder functions as a lender to the issuer of the Debenture. In return, a specific rate of interest is paid to the Debenture holder by the Debenture issuer similar to the case of a loan. In practice, the differentiation between a Debenture and a Bond is not observed every time. In some cases, Bonds are also termed as Debentures and vice-versa. If a bankruptcy occurs, Debenture holders are treated as general creditors. The Debenture issuer has a substantial advantage from issuing a Debenture because the particular assets are kept without any encumbrances so that the option is open for issuing them in future forfinancing purposes.
Collaterals: Collaterals are assets or properties which are provided to secure a loan or any other type of credit. If there is a default, Collateral is a subject of seizure. Collateral is a type of security provided to the lender if there is a default on behalf of the borrower in repayment of loan. For instance, if a person takes a mortgage loan, the Collateral would be his house. Debentures are categorized into the following types: •Convertible Debentures: This is a debenture which can be converted into some other type of securities (for example stocks). •Corporate Debentures: Corporate Debentures are Debentures issued by companies and they are insecure in nature. Bank Debentures: This type of Debentures is issued by banks. •Government Debentures: These include Treasury bond (T-Bond) and Treasury bill (T-Bill) issued by the government. They are usually regarded as risk-free investments. •Subordinated Debentures: This is a particular type of Debenture, which ranks below regular Debentures, senior debt, and in some instances below specific general creditors. •Corporation Debentures: Corporation Debentures are issued by various corporations. •Exchangeable Debentures: They are like Convertible Debentures, but this Debenture can only be converted to the common stock of a subsidiary company or affiliated company of the Debenture issuer.
There are some other types of Debentures such as Senior Debentures, Secured Debentures, Exchange Debentures, Secured Convertible Debentures, Convertible Senior Debentures, Unsecured Convertible Debentures, Subordinated Convertible Debentures, Senior Secured Convertible Debentures, Junior Subordinated Debentures, Senior Subordinated Debentures, and Senior Secured Debentures etc. Bonds And Debentures In India A Bond is a loan given by the buyer to the issuer of the instrument. Bonds can be issued by companies, financial institutions, or even the government. Over and above the scheduled interest payments as and when applicable, the holder of a bond is entitled to receive the par value of the instrument at the specified maturity date. Bonds can be broadly classified into a. Tax-Saving Bonds . Regular Income Bonds Tax-Saving Bonds offer tax exemption up to a specified amount of investment. Examples are: a. ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961 b. NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961 c. RBI Tax Relief Bonds Regular-Income Bonds, as the name suggests, are meant to provide a stable source of income at regular, pre-determined intervals. Examples are: a. Double Your Money Bond b. Step-Up Interest Bond c. Retirement Bond d. Encash Bond e. Education Bonds f. Money Multiplier Bonds/Deep Discount Bond Similar instruments issued by companies are called debentures. Features: Bonds are usually not suitable for an increase in your investment. However, in the rare situation where an investor buys bonds at a lower price just before a decline in interest rates, the resultant drop in rates leads to an increase in the price of the bond, thereby facilitating an increase in your investment. This is called capital appreciation. •Bonds are suitable for regular income purposes. Depending on the type of bond, an investor may receive interest semi-annually or even monthly, as is the case with monthly-income bonds. Depending on one’s capacity to bear risk, one can opt for bonds issued by top-ranking corporates, or that of companies with lower credit ratings.
Usually, bonds of top-rated corporates provide lower yield as compared to those issued by companies that are lower in the ratings. •In times of falling inflation, the real rate of return remains high, but bonds do not offer any protection if prices are rising. This is because they offer a pre-determined rate of interest. •One can borrow against bonds by pledging the same with a bank. However, borrowings depend on the credit rating of the instrument. For instance, it is easier to borrow against government bonds than against bonds issued by a company with a low credit rating. •There are specific tax saving bonds in the market that offer various concessions and tax-breaks.
Tax-free bonds offer tax relief under Section 88 of the Income Tax Act, 1961. Interest income from bonds, upto a limit of Rs 9,000, is exempt under section 80L of the Income tax Act, plus Rs 3,000 exclusively for interest from government securities. However, if you sell bonds in the secondary market, any capital appreciation is subject to the Capital Gains Tax. •bonds are rated by specialised credit rating agencies. Credit rating agencies include CARE, CRISIL, ICRA and Fitch. An AAA rating indicates highest level of safety while D or FD indicates the least. The yield on a bond varies inversely with its credit (safety) rating. As mentioned earlier, the safer the instrument, the lower is the rate of interest offered.
Assurance In Bonds: This depends on the nature of the bonds that have been purchased by the investor. Bonds may be secured or unsecured. Firstly, always check up the credit rating of the issuing company. Not only does this give you a working knowledge of the company’s financial health, it also gives you an idea about the risk considerations of the instrument itself. This knowledge makes for a better understanding of the available choices, and helps you take informed decisions. In secured instruments, you have a right to the assets of the firm in case of default in payment. The principal depends on the company’s credit rating and the financial strength.
Selling in the secondary market has its own pitfalls. First, there is the liquidity problem which means that it is a tough job to find a buyer. Second even if you find a buyer, the prices may be at a steep discount to its intrinsic value. Third, you are subject to market forces and, hence, market risk. If interest rates are running high, bond prices will be down and you may well end up incurring losses. On the other hand, Debentures are always secured. Interest payments depend on the health and credit rating of the issuer. Therefore, it is crucial to check the credit rating and financial health of the issuer before loosening up your purse strings.
If you do invest in bonds issued by the top-rated corporates, rest assured that you will receive your payments on time. Risks In Bonds: In certain cases, the issuer has a call option mentioned in the prospectus. This means that after a certain period, the issuer has the option of redeeming the bonds before their maturity. In that case, while you will receive your principal and the interest accrued till that date, you might lose out on the interest that would have accrued on your sum in the future had the bond not been redeemed. Inflation and interest rate fluctuation affect buy, hold, and sell decisions in case of Bonds. Always remember that if interest rates go up, bond prices go down and vice-versa. Buying, Selling, And Holding Of Bonds:
Investors can subscribe to primary issues of Corporates and Financial Institutions (FIs). It is common practice for FIs and corporates to raise funds for asset financing or capital expenditure through primary bond issues. Some bonds are also available in the secondary market. The minimum investment for bonds can either be Rs 5,000 or Rs 10,000. However, this amount varies from issue to issue. There is no prescribed upper limit to your investment-you can invest as little or as much as you desire, depending upon your risk perception. Bonds offer a fixed rate of interest. The duration of a bond issue usually varies between 5 and 7 years. Liquidity Of A Bond:
Selling in the debt market is an obvious option. Some issues also offer what is known as ‘Put and Call option. ‘ Under the Put option, the investor has the option to approach the issuing entity after a specified period (say, three years), and sell back the bond to the issuer. In the Call option, the company has the right to recall its debt obligation after a particular time frame. For instance, a company issues a bond at an interest rate of 12 per cent. After 2 years, it finds it can raise the same amount at 10 per cent. The company can now exercise the Call option and recall its debt obligation provided it has declared so in the offer document.
Similarly, an investor can exercise his Put option if interest rates have moved up and there are better options available in the market. Market Value Of A Bond: Market value of a bond depends on a host of factors such as its yield at maturity, prevailing interest rates, and rating of the issuing entity. Price of a bondwill fall if interest rates rise and vice-versa. A change in the credit rating of the issuer can lead to a change in the market price. Mode Of Holding Bonds: Bonds are most commonly held in form of physical certificates. Of late, some bond issues provide the option of holding the instrument in demat form; interest payment may also be automatically credited to your bank account.
