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(^48) Financial Management
periods the discount is also higher, hence the term deep discount. Although long term
maturity is the norm, short maturities are not uncommon, for example GE Capital had
an issue of DDBs with a maturity period of 17 months and 29 days.
The first issue of DDBs was made by Small Industries Development Bank of India
(SIDBI). Each DDB, with a face value of Rs.1,00,000, was issued at a discounted
price of Rs.2,500 with a maturity period of 25 years from the date of allotment. Both
the investors and SIDBI have an option of withdrawing or redeeming the bond (call &
put options) respectively at the end of 5th, 9th, 12th, 15th, or 20th year from the date of
allotment at the deemed value of Rs.5,300, Rs.9,600, Rs.15,300, Rs.25,000 and Rs.50,000
respectively.
After the success of the SIDBI issue, all the prominent financial institutions like IDBI,
ICICI, etc. came out with the issues of DDBs. All these issues, however, were called
by the institutions as the interest rates fell.
Zero Interest Bonds (ZIBs)
Very much alike DDBs, the only crucial difference is that these are issued at face
values (DDBs are issued at a discount to face value) and the redemption is at a premium.
Tax treatment of both is the same.
Secured Premium Notes (SPNs)
SPNs are bonds issued by corporations which are medium term in nature, maturing
between 3 to 8 years. The advantage is the flexibility it offers in giving the returns as
premium or interest payments depend upon the preferences of the holders.
The only issuer of SPNs in the Indian markets till now is TISCO Ltd. It issued SPNs
of Rs.300 each. The repayment started after three years, and there was no payment
of interest in between. The repayment went on for four years starting from the fourth
year to seventh year. Every year there will be a payment of Rs.150 (totalling
Rs.150*4=Rs.600 in four years). Rs.75 in this would be accounted for as principal
repayment and the rest Rs.75 could be taken as a mixture of interest and premium at
the option of the investor. (Rs.25 as interest + Rs.50 as premium; Rs.37.50 interest +
Rs.37.50 premium; Rs.50 interest + Rs.25 premium).
The advantage of this was easier tax planning for the investor, but the tax authorities
were not happy with this kind of an arrangement. TISCO also attached an equity
warrant which was convertible into equity at a price which was at considerable discount
to the market price prevailing at that time.
Floating Rate Bonds (FRBs)
Bonds whose interest payments fluctuate with changes in the general level of interest
rates and are tied to a basic rate (known as the reference rate). The first issue in India