How to Choose the Best Infrastructure Bonds?
Infra bonds can save up to 6,180, a good reason why you must not give it a miss
PRASHANT MAHESH (Posted on 10-01-2012)
Infrastructure bonds are making a splash these days just in time before the end of the taxsaving season in March. Currently, issues are open for subscription from Infrastructure Finance Corporation of India (IFCI), Rural Electrification Corporation (REC), PTC India Financial Services and SREI Infrastructure Finance. IDFC has already raised . 533 crore through its issue of infrastructure bonds which closed for subscription in December 2011. The company is likely to come up with its next tranche of these bonds soon. You can invest up to . 20,000 in these bonds and claim tax deduction under Section 80CCF. If you are in the highest tax bracket, you can save as much as . 6,180 by investing in these bonds. “The . 20,000 limit for investment in infrastructure bonds is in addition to the . 1 lakh tax deduction limit available under Section 80C and hence merits investment. You can choose an issuer of these bonds based on the credit rating, interest rates offered and the financial credentials of the company”, says K Ramalingam, director and chief financial planner, Holistic Investment Planners.THE COMMON ELEMENTS All issues have tenures of 10 years and 15 years. There is a buyback option at the end of five years from the date of allotment, and liquidity will also be offered by listing the bonds on the stock exchange once the mandatory lock-in period of 5 years is over. While the buy-back facility for the 10-year bonds is after 5 years, for the 15-year option it comes after 7 years. All of them provide annual and cumulative options of interest payment for both maturity tenors. You can choose to apply for only the 10- year bonds or only the 15-year bonds or a combination of the two. If you have a demat account you can apply in the demat mode, else you can even opt for physical certificates. If you are applying in the demat mode, you need to provide details of your demat account along with a copy of your Permanent Account Number (PAN) card, along with a cheque. However, if you are looking to invest in physical form, you need to attach a copy of your residence proof as well. The face value of each bond is . 5,000 and one has to make an application of one bond and in multiples of one bond thereafter. There is no upper limit on the amount you can invest. Only in the case of SREI Infra, the face value is . 1,000 and one can apply for a minimum of one bond.
CHOOSING ONE OVER OTHER The issues on offer differ in interest rates, ratings and buy-back options after the lock-in period. IFCI pays the highest interest amongst all of them. For a 10 year period, IFCI pays 9.09% while, REC pays 8.95%, PTC India Financial pays 8.93% and SREI Infra Finance pays 8.9%. For the 15 year tenure, IFCI pays 9.16% while all others pay 9.15%. While REC and IFCI are owned by the government, PTC India Financial Services parent namely PTC, is a government promoted public private partnership and SREI Infra is a private player.
In terms of ratings, REC scores as it has an AAA rating which indicates highest degree of safety in terms of timely repayment of principal and interest. As compared to this, IFCI, PTC India Financial Services and SREI Infra have a lower rating.
IFCI bonds enjoy a “BWR AA-” by Brickwork Ratings, “CARE A+” by CARE and “LA” by Icra. PTC India Financial Services has been assigned an A+ rating by CARE and ICRA. SREI infra bonds enjoy a rating of CARE AA. “Since REC and IFCI are owned by the government, the margin of safety is high. Investors could choose from either of the two”, says Rajendra Routela, director, RR Investors. For those who are ready to split the amount in two issues, there is another strategy. “If you want the best of high rates as well as high rating, invest . 10,000 in the 10-year option of IFCI at 9.09%, and . 10,000 in the 15-year option of REC at 9.15%. With this strategy you get the highest rates awell as highest safety”, says Deepak Panjwani, head-debt markets, GEPL Capital. However, not all financial planners would advise you to split investments since the amount of . 20,000 is small and would make it difficult to track over a 5-year period. “If you are the one who prefers simplicity, restrict yourself to one issuer and invest the entire . 20,000 there”, says Srikanth Meenakshi, Founder, fundsindia.com. Finally, even if you are short of funds and cannot invest right now, do not lose hope. “There will be multiple issues right till the end of the financial year and you can invest in any of them when you have liquidity”, says Deepak Panjwani.
INVEST ONLY . 20,000 Many investors do feel that it is a tedious process to invest in these bonds. One, the amount is too small and they are locked in for a period of 5 years. Over a period of five years, you may have multiple series of bonds from multiple issuers which would make tracking difficult. However, investment experts feel this could mean you end up losing an option to save . 6,180 in taxes every year, assuming you are in the highest tax bracket.
“Infrastructure bonds are the only products available under Section 80CCF and hence investors would do well to take advantage of this and save tax”, says Rajendra Rautela. However, experts advise against investing more than . 20,000, as the interest income here is taxable. So if you are in the highest tax bracket, a return of 9% would translate into a post-tax return of 6.24%. As against this, tax-free bonds from public sector units like NHAI and PFC on offer would give you 8.3%. If your income is not taxable, bank FDs may offer you slightly higher returns, and with better liquidity.
Source: Economic Times Daily
Sebi Opens Another Window of Opportunity for Share Sale
—REENA ZACHARIAH (Posted on 06-01-2012)
WHAT IS THE NEW OFFER FOR SALE OF SHARES WINDOW WHICH HAS BEEN OPENED BY SEBI? It is a window where a promoter or a promoter group, which is eligible for trading, can offer shares for sale to any class of investors in the secondary market during normal trading hours. The buyer has to provide the money upfront.
HOW DOES THIS NEW METHOD WORK?
The seller needs to first inform the public about the proposed sale.Subsequently, a special window will be opened on the stock exchange to facilitate the transaction. Any investor, through a stock broker, can then place the order by making an upfront payment. The transaction is executed based on price bids. The bidder who has made the highest price offer will be allotted shares first and then based on the descending price offers, shares are allotted accordingly to the other bidders. The transaction can also be executed based on clearing price — which is one common price for all bidders. There is no cap on the number of bidders.
HOW DOES THE OFFER FOR SALE OF SHARES UNDER THE NEW METHOD BENEFIT PROMOTERS? It facilitates the sale of a large chunk of their shares. It also aids in price discovery for these shares and is considered a transparent method. Also, unlike a followon public offering, the number of steps involved in this is far less. In a follow-on offering, there is a time lag for promoters before they can raise funds, giventhe time taken for securing approvals. This is seen as a positive move as it reduces the time lag. Besides, promoters who sell their holdings will also benefit as they will be able to avoid volatile price movements in their stocks during the runup to a public offering. This should suit the government more which is the dominant shareholder in scores of listed firms onsidering the time taken to bring the issue to the market.
WHAT IS THE DIFFERENCE BETWEEN THE AUCTION ROUTE AND BLOCK DEALS? A block deal is a negotiated deal between the seller and buyer, while in an auction route, it is an open transaction allowing anyone to bid. There is a restriction on the trading period, pricing and the quantity of shares to be sold when it comes to a block deal. However, there are no such limitations in an auction route. For instance, the block deal window has a 2% price limit based on market price.
WILL THIS BOOST THE MARKET? It will improve liquidity in the market besides broadening the investor base, as it allows all types of investors, including long-only funds, hedge funds and retail investors to participate in the offering.
Source : Economic Times Daily
Make Your Current Tax Plan DTC-ready (Posted on 20 Dec 2011)
The Proposed Direct Tax Code to be in force from April 2012, could impact current investments. Here's how you can minimize any damage
PREETI KULKARNI
For many salaried tax-payers, December 31 is not just the much-awaited New Year's eve. It has another significance: it’s also the deadline set for them by many companies to submit their investment declaration for the financial year to help them save tax. This year, tax-payers should be careful due to the possible implementation of the Direct Tax Code from April 2012. After all, its applicability is not restricted to investments made only after April 1 next year, unless the government issues a clarification to the contrary. Remember, however, that the code is yet to take the shape of a formal legislation. It may see see changes before it becomes a law.
Nevertheless, it wouldn’t hurt to factor in the possible impact DTC may have on tax-saving investments done in this financial year. Here’s a guide to DTC’s impact on some popular tax-saving avenues:
HOME LOAN REPAYMENT
At present, home loan repayment is eligible for deductions under sections 80C and 24. Under Section 80C, principal repayment of up to . 1 lakh qualifies for deductions. Section 24 offers tax benefit on interest of up to . 1.5 lakh paid on the loan. “DTC provisions will hurt persons servicing home loans now, as repayment of the principal amount will no longer feature as a tax-saving tool, although, interestingly, deductions on the interest paid will continue to be allowed,” says Mayur Shah, tax director, Ernst & Young.
If the tax relief on the principal repaid is removed, “the individual may consider diversifying his investments through other taxsaver options”, says Parizaad Sirwalla, executive director, Tax, KPMG. “However, before making any investment decision, the individual should evaluate his personal financial plan in addition to the tax impact.”
EQUITY-LINKED SAVING SCHEME
Equity-linked Saving Scheme, or ELSS, is a tax-saving mutual fund that finds favour with most financial planners as it offers equity exposure and comes with nominal exit barriers. Equities are known to have the potential to offer higher returns than other asset classes. Investments in ELSS funds are locked in for only three years, unlike with other tax-saving avenues such as unit-linked insurance policies and PPF where withdrawals before five and 15 years, respectively, come at the cost of some benefits. Also, dividends and redemption proceeds from ELSS, too, are not taxable. The DTC, however, seeks to deprive ELSS of its place in the tax-saving basket. But, this financial year, you can avail of deduction under section 80C for ELSS investments, since it does not entail recurring payments like with insurance premiums.
“Once your overall asset allocation strategy has been created, it would really not matter whether your equity allocation is in pure equity mutual funds or tax-saving funds,” says Prerana Salaskar-Apte, chartered accountant and certified financial planner with The Tipping Point. “The overall limit for investing in PPF has been raised now. Hence, it makes more sense to rebalance your debt-equity allocation (for tax-savings) to PPF, given the attractive risk-free rates.”
INSURANCE
Some of the key changes to the current tax-saving instruments envisaged under DTC relate to the insurance space. For one, deductions for life and health insurance premium, unlike in the current scenario, will be clubbed together. If the DTC is implemented in its existing form, total savings-related deduction will be . 1.5 lakh. And, of this, deduction on life as well as health insurance premium and children’s tuition fees will be restricted to . 50,000 per financial year.
Under the current laws, life insurance premium qualifies for deduction under 80C, subject to the overall cap, while health insurance premium of up to . 15,000 is eligible for tax benefits under section 80D. Further, if you pay your parents’ health premium, too, you can get an additional deduction of . 15,000 (. 20,000 if parents are senior citizens).
LIFE INSURANCE: Under DTC,
Ulips may lose their lustre as a tax-saving instrument. Not only will the amount eligible for tax rebate reduce under the proposed DTC, you will not be eligible for any deduction if the annual premium exceeds 5% of the policy’s sum assured. In other words, for tax benefits, the cover should be at least 20 times the annual premium. If your policy does not meet this requirement in any of the policy years, then the maturity proceeds will be taxed. The proceeds will be exempt from tax only if they are received upon completion of the original period of contract of the insurance.
Worse, the DTC’s provisions will apply to all policies, regardless of whether they were bought before or after the code came into effect. “There are no provisions in the current version of the DTC to protect the existing policies,” says Shah of E&Y.
So, if you intend to buy an investment-cum-insurance policy this year, exercise caution. “First, calculate the amount of cover you would need to protect your family. Though tax-planning also needs to be considered, go shopping for the right plan only after you have realised the actual cover you would need. Remember, insuring your family deserves a higher priority than saving tax,” says Salaskar-Apte of The Tipping Point.
Most pure term policies available today already satisfy the proposed DTC’s condition regarding the premium to the sum assured ratio. Also, the current premium amounts will not exceed the reduced cap on the amount that will be eligible for tax benefits.
“For a 35-year-old individual looking for a 25-year policy and a . 50,00,000 cover, the annual premium would work out to nearly . 25,000. Thus, in such cases, the DTC will not make any difference,” says Salaskar-Apte.
HEALTH INSURANCE: If you buy a term plan, chances are your annual life premium may not exceed the . 50,000 ceiling on insurance premium for saving tax under DTC. This will leave ample scope for you to fully utilise the total limit by adding a health policy to your portfolio. Thus, you would be ensuring prudent financial planning besides covering your health.
LEAVE TRAVEL ALLOWANCE
An individual is allowed to claim exemption on the leave travel allowance, or LTA, twice in a block of four calendar years (the current block runs from January 2010 to December 2013). DTC, however, threatens to play spoilsport here. “The exemption for leave travel concessions (LTC) is not envisaged in the DTC 2010. Hence, an individual entitled to it may consider availing of the concession before the DTC is implemented and avoid carrying over the entitlement,” advises Sirwalla of KPMG. If you have not claimed it already, it is best to do so this year itself.
Soucre: Economic Times Daily
NEW TREATY TO SAVE THE EURO (Posted on December 12 2011)
Twenty-three European Union states agreed on Friday to set up a new treaty, giving up crucial powers over their own budgets in an attempt to overcome a crippling debt crisis.
WHICH ARE THE COUNTRIES THAT SUPPORT THE TREATY? All 17 countries that use the euro, plus Denmark, Latvia, Lithuania, Poland, Romania and Bulgaria. Those six states are likely to eventually adopt the common currency, so it makes sense for them to subscribe to the rules now.
WHICH COUNTRIES ARE OPPOSING IT? The UK and Hungary gave a clear “no,” while Sweden and the Czech Republic left the door open to sign up at some point.
UNRESOLVED ISSUES
1 Euro zone leaders did not decide to boost the overall firepower of their own bailout funds, which is currently limited to e500 billion. They promised to reconsider that cap in March
2 They did not give a clear signal that the European Central Bank will buy bonds from struggling countries on a massive scale to keep their funding costs in check.
3 They did n ot agree to more intrusive powers for the European Commission over the fiscal policies of wayward states, as had been demanded by European Council President Herman Van Rompuy. Instead, they promised to "examine swiftly" much more lenient proposals from the Commission.
4 They did not allow the bailout funds to directly recapitalise failing banks. That could have prevented countries from taking on more debt when they have to bail out lenders.
STRATEGIES TO
ESCAPE DEBT TRAP
Debt brakes:All 23 countries commit to keep their deficits below 0.5% of economic output. That cap can only be broken in exceptional circumstances. The European Court of Justice will make sure all states' debt brakes are effective.
Automatic penalties:It will be more difficult for countries to stop one of their partners from being punished for breaking the EU's debt and deficit rules. All states have to tell their partners in advance how much debt they plan to take on through bond sales.
IMF aid: The euro zone, together with other willing EU states, will give as much as euro 200 billion to the IMF, so that it can help beef up the euro zone's firewalls.
European Stability Mechanism: The euro zone's new, permanent bailout fund, the European Stability Mechanism, will take over from the current rescue fund, the European Financial Stability Facility, one year ahead of schedule, in July 2012. Unlike the EFSF, a hastily set up private company owned by all euro zone states, the ESM is a permanent organization run by governments. It also has paid-in capital, similar to a bank, and is therefore more credible on financial markets.
Source: Economic Times Daily
Article 1
SAVING PRIVATE AIRLINES(posted on 12 December 2011)
Why are Indian airlines in the red despite rising passenger traffic? Because of high taxes on fuel and rising operational costs. Moreover, cutthroat competition in the sector prevents airlines from raising ticket prices. Taxes constitute 40% of an airline's total expenditure, far above the global average of 32%. Besides, revenues barely cover operational costs. For instance, operating margin for Kingfisher stands at 0.12 while it is negative for Jet Airways (-8.25%) and Spice Jet (-6.7%).
Why can't airlines raise fares to cover these costs? Fierce competition in the Indian skies prevents them from doing so. In the case of Jet, cost per available seat km (ASKM) rose to Rs 3.31 in the second quarter of this fiscal compared with Rs 2.74 in the previous quarter. In contrast, revenue passenger km (RPKM) has crawled up to Rs 3.63 from Rs 3.5.
So if an airline goes bust, should the government bail it out? The tempting answer is that those responsible for corporate recklessness must bear the consequence, but in real world things are not so simple. Many experts argue that had Lehman Brothers not been allowed to go bust, the financial crisis could have been less damaging. But, a corporate bailout sends the wrong signal or creates a 'moral hazard' of encouraging more recklessness, the cost of which is borne by the taxpayer.
What is moral hazard? In economic theory, the concept of moral hazard comes from the insurance industry where an individual or a company behaves differently when he is protected from a risk than when he is exposed to the risk. The guarantee of insurance can make the insured less risk averse, as he knows he is protected from the financial consequences of his actions.
How does the concept apply to bailouts? If a company believes its existence is crucial for the economy or for public good, it may be tempted into taking reckless risks believing that the government will step in to bail it out if it were to land in trouble. Therefore, any rescue of troubled private sector firms makes others believe that they could also be similarly helped out if things went wrong.
Source: Economic Times Daily
