Inflation-indexed bonds may debut soon
For those looking out for some good long-term investment options, the wait may soon be over. Inflation-indexed bonds could be coming in the next fiscal, but not from the government.
NEWDELHI: For those looking out for some good long-term investment options, the wait may soon be over. Inflation-indexed bonds could be coming in the next fiscal, but not from the government.
Instead, it could be big infrastructure players, who could create a win-win situation for buyers and issuers. The government has already introduced zero coupon bonds this year for infrastructure companies, but companies are claiming further sops to make it attractive for investors.
The option is, therefore, to allow companies to set a rate of interest on these bonds, different from the prevailing market rates. The better rate would include a mark-up for the expected inflation rate, so that the capital invested by the buyers of these bonds is protected.
The companies feel that a zero-coupon bond or deep discount bond already notified by the government and linked to market rates of interest, gives them no leeway to make the offer attractive for investors. If the inflation rate, in the future, is higher than the discount level, then the prospective investor could actually lose money by investing in zero-coupon bonds.
The bond notified this year offers the sum at face value only at maturity or redemption. While several infrastructure and infrastructure financing companies have lined such bonds, with tenure of 10 or 20 years, they are, therefore, keen on the sweetener.
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Incidentally, the government has rejected the proposal to allow either the zero-coupon or the inflation-indexed bonds to be issued as FCCBs. Infrastructure and infrastructure finance companies have been looking at the bond route to meet their massive financing needs of providing funds for long-gestation infrastructure projects and also allow them to stagger the returns or cost of bonds in the tenure. Finance minister P Chidambaram had, at the infrastructure summit in October, highlighted that there was a lack of long-term investment options for the public. The government has already tweaked the tax regime for zero-coupon bonds in the last Budget.
As per these guidelines, income on transfer of a zero-coupon bond, not being stock-in-trade, would be treated as capital gain. Thus, there would be capital gains when the bond is sold in the capital market, or when it matures. In the earlier regime, the company issuing had to cut tax at source on the interest income even though the income was accruing to the investor after the tenure.
The company issuing these bonds would have to given an undertaking with its application that funds garnered through the bonds would be invested in a manner specified in the guidelines given by the Central Board of Direct Taxes.
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