Arnav Pandya on Indore Municipal Corporation’s green bonds & what’s in it for investors

“A green bond enables an investor to do good while investing because the end purpose of the use of this money is for a better climate and a healthier climate. In this kind of green bonds, the investor is achieving his primary goal of lending money, getting interest on something and at the same time also doing good,” says Arnav Pandya, Founder, Moneyeduschool.

How do you look at green bonds being issued by the Indore Municipal Corporation and what is your assessment?
Bonds as an instrument is a form of debt whereby somebody is borrowing from you and at the end of a certain period you will get the money back. So as an investor when you are looking at the bond you need to factor in two, three things; one is the stability of the issuer because ultimately when you are lending someone money, your money has to come back.

Second is the kind of return that you are getting.


Third is the fact that, what is the tenure for which the amount is being lent.

Now if you look at green bonds, it also enables an investor to do good while investing because the end purpose of the use of this money is for a better climate and a healthier climate. In this kind of green bonds, the investor is achieving his primary goal of lending money, getting interest on something and at the same time also doing good. It is a mixture of these two factors which also makes these kinds of bonds one, new and also attractive for investors.

The interest rate looking at the current fixed income scenario is very promising at the moment?
The interest rates are better than what we would see for many other instruments in the market but one thing has to be known. The bond is being issued by the Indore Municipal Corporation which has a good credit rating so in that case it is not a cause for concern.

Second, the actual rate is 8.25% but there are two choices. If you take out the interest in the form of a payout, your rate of return remains 8.25%. But if you keep the money there and take it out at the end of the investment period, then the rate becomes 8.42% because this rate is compounded every half year. So compounding and keeping the money in there raises your return by a few bps and which is what happens when you compound money. If you compare it to many other instruments, this is a very good rate and which is why across all segments – retail investors, HNIs or even institutions – this bond has received a good response.

This bond is getting listed on the 22nd. What about the withdrawal scenario and the kind of tax implication an investor would have?
There are two things here -- when the bond gets listed, it provides an exit opportunity for investors who want to exit before the end of the tenure of the bond. So, when it is traded on the secondary debt market, you will find that any investor who wants to liquidate their investment or on the other side if you have new investors who want to take an exposure to this bond, can do so by the secondary market route.

The second part is in terms of the taxability of the instrument. The interest which is earned on the bond is taxable in the hands of the investor. It will be taxable under the head of income from other sources so that part is there. If for example, the investor holds the bond till maturity, redemption will be at the face value and so that is not going to give any capital gains.

But if they have sold the bond in the capital market before the expiry period and have either a capital gain or a capital loss, if there is a capital gain, then the period is that if it is sold before a period of three years, this is a short-term capital gain which will be taxed at the applicable tax slab of the individual. If more than three years have passed, then this will be a long-term capital gains, where the rate is 20% with the benefit of indexation.