DEFINITIONAccording to Thomas Evelyn: “A debenture is a document under the

company’s seal which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating charge on the company’s property or undertaking and which acknowledges a loan to the company’s property or undertaking and which acknowledges a loan to the company”

FEATURES OF BONDSMaturityCouponPrincipalControlCall Feature

ADVANTAGES OF DEBENTURESTO THE COMPANY:Debentures provide long term funds to a company.The rate of interest payable on debentures is, usually, lower

than the rate of dividend paid on shares.Debt financing does not result into dilution of control

because debenture holders do not have any voting rights.Many companies prefer issue of debentures because of the

fixed rate of interest attached to them irrespective of the changes in price levels.

Debentures provide flexibility in the capital structure of a company as the same can be redeemed as and when the company has surplus funds and desire to do so.

CONTD…………..TO THE INVESTORS:Debentures provide a fixed, regular and stable source of

income to its investors.It is comparatively a safer investment because debenture

holders have either a specific or a floating charge on all the assets of the company.

Many investors prefer debentures because of a definite maturity period.

A debenture is usually more liquid investment and an investor can sell or mortgage his instrument to obtain loans from financial institutions.

The interest of debenture holders is protected by various provisions of the debenture trust deed and guidelines issued by the SEBI in this regard.

DISADVANTAGES OF DEBENTURESFROM THE COMPANY POINT OF VIEW :The fixed interest charges and repayment of principal

amount on maturity are legal obligations of the company. These have to be paid even when there are no profits.

The use of debt financing usually increases the risk perception of investors in the firm. This enhanced financial risk increases the cost of equity capital.

Cost of raising finance through debentures is also high because of high stamp duty.

Contd…….FROM THE INVESTORS POINT OF VIEW :Debentures do not carry any voting rights and hence its

holders do not have any controlling power over the management of the company.

Debenture holders are merely creditors and not the owners of the company.

Interest on debentures is fully taxable while shareholders may avoid tax by way of stock dividend in place of cash dividend.

The prices of debentures in the market fluctuate with the changes in the interest rates.

Uncertainly about redemption also restricts certain investors from investing in such securities.

TYPES OF DEBENTURES Redeemable Debentures Irredeemable Debentures Convertible Debentures Zero coupon bonds Secured or Mortgaged Debentures.

The Industrial Development Bank of India LimitedIDBI was incorporated in 1964 and is one of the leading

private banks of India. IDBI is the founder of the following institutions:

The National Stock Exchange of India (NSE) National Securities Depository Services Ltd (NSDL) The Stock Holding Corporation of India Limited

(SHCIL)

BONDS OFFEREDTax Savings Bonds: offered with a maturity period

of 3 years with an interest rate of 5.5%. Regular Income Bonds: provide better returns

with a lower risk factor. They are appropriate for high net worth investors to diversify risk.

Growing Interest Bonds: has a maturity period of five years with Yield To Maturity (YTM) of 6.3%.

Retirement Bonds: offer YTM of 7.24% with a maturity period is 10 years. These are quite lucrative for investors looking for high net worth.

CONTD……There has been revision in the credit rating of IDBI's

outstanding bond issues. The "AAA" or triple A rating has been revised to

"AA+" (stable) by CRISIL (Credit Rating Information Services of India Limited).

The "LAAA" or L triple A rating has been revised to "LAA+" (stable) by ICRA (Indian Credit Rating Agency).

The "Ind AAA" has been revised to "Ind AA+" (stable) by FITCH.

Infrastructure Bonds

While presenting the Union Budget 2010 in the parliament on February 26, 2010, Finance Minister Pranab Mukherjee proposed the deduction in infusions in long-term infrastructure bonds in India of upto Rs 20, 000.

 This came as the relief to the individual taxpayers in

context of expenditure as well as saving. Prior to the Union Budget 2010 announcement, the inclusion of tax-free bonds was doubted by the industry analysts keeping in consideration the dipping finances of the state and dearth of foreign investment. The announcement not only surprised the common man but also the industry observers.

HOW TO INVEST IN INFRASTRUCTURE BONDSInfrastructure Bonds are available through issues of

ICICI and IDBI, in the name of ICICI Safety Bonds and IDBI Flexibonds. They can reduce tax liability by upto Rs 16,000 per annum. Both the bonds provide investors the option of purchasing and holding the instruments either as physical certificates or in the demat form. The Tax-Saving Bond from ICICI for the month of July 2001 provides two options:

• Face value of Rs 5,000 for 3 years at the rate of 9.00% interest payable annually.

CONTD…..Deep Discount Bonds with a face value of Rs 6,600.

These bonds are available for Rs 5,000, and are issued for 3 years and 4 months, after which they are redeemed at their face value. These infrastructure bonds are suitable for an increase in the investment. The terms for the IDBI Bonds are similar too.

Apart from the above Infrastructure Bonds , Rural Electrification Corporation (REC) has come out with an issue of tax-saving infrastructure bonds for investors seeking to utilize the additional Rs 30,000 qualifying limit for investments in Infrastructure Bonds.

POINTS TO REMEMBER BEFORE INVESTING IN INFRASTRUCTURE BONDSInfrastructure Bonds do not offer any protection

against high inflation since the rate of interest they offer is pre-determined.

Against the pledging of the infrastructure Bonds with a bank, one can borrow money from banks. The amount depends on the market value of the bond and the credit quality of the instrument.

Moreover, it should be noted that although Infrastructure Bonds are considered to be safe, there is no assurance of getting the full investment back.

LIC INFRASTRUCTURE BONDSIf you are tax payer then you can save more tax by

investing in LIC Infrastructure Bond. Additional Rs.20,000 Tax Exemption under Section 80CCF.

LIC Infrastructure Bond at Glance:Term: 10 years Minimum lock in period: 5 years Loan on Bond: After 5 years Interest Rate: 7.85%-7.95% after tax. Exit options: Buy back or through Demat account Open for Individual or HUF.Any individual or HUF can invest in LIC’s

Infrastructure Bonds Between Rs.5000 – Rs.20,000/- This will be over the Rs.1 lakh deduction allowed under Section 80C.

CONTD…….Apart from LIC, Infrastructure bond is also

offered by following companies:Industrial Finance Corporation of India (IFCI),Infrastructure Development Finance Company (IDFC) andNon-Banking Finance Company (NBFCs) who are classified as an infrastructure finance company by the Reserve Bank of India (RBI)Life Insurance Corporation of India (LIC)

Features of the IDFC Long Term Infrastructure Bond

Interest Rate of 7.5% or 8.0%These bonds are getting issued under two lock in

options:1. Ten year maturity: The bond will be issued with a

ten year maturity and offer 8.0% interest per annum.2. Ten year maturity with an option for buy-back

after 5 years: This bond will also be issued with a ten year maturity, but there will be buy back option after 5 years. The interest rate on this is 7.5% per annum.

Further, under each of these options, you can choose to get the interest accumulate or paid out to you annually.

CONTD…. Minimum Investment in the IDFC Long Term

Infrastructure BondThe face value of the infrastructure bond is Rs. 5,000, and

you have to apply for a minimum of two bonds, so the minimum investment in this infrastructure bond is Rs. 10,000.

Open and Close dateThe infrastructure bond issue opened on September 30th

2010, and will close on October 18th 2010. Credit RatingIDFC has received the LAAA by ICRA which is it’s highest

rating, and these infrastructure bonds are secured debt also, so in that respect they are relatively safe.

CONTD….Listing on the stock exchangeAfter the initial lock in period, the bonds will

list on NSE and BSE.

Bond valuation

Bond valuation is the act of determining the fair price of a bond. As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate. Hence, the value of a bond is obtained by discounting the bond's expected cash flows to the present using the appropriate discount rate. Determining this rate in practice - i.e. "pricing" the bond - is done with reference to other instruments. Once the price or value has been calculated, the sensitivity of the price can then be estimated; the various yields, which relate the price of the bond to its coupons, can also be determined.

CONTD….When the bond includes embedded options, the

valuation is more specialized and combines option pricing with the cash flow based approach. Depending on the option as embedded, the option price as calculated is either added to or subtracted from the price of the "straight" portion. This total is then the value of the bond; the various yields can then be calculated for the total price.