Jun 26, 2000|
IDBI flexibond '96 investors to switch to FD Scheme
The Industrial Development Bank of India (IDBI) has launched a special deposit scheme - IDBI Suvidha (fixed deposit scheme) - with effect from June 26, 2000. The scheme is expected to mop-up Rs 22 bn worth of outflow on account of premature redemption of the discount bonds (Flexi 1996), the first of the flexi bond series issued five years ago. The scheme is only for the bondholders of flexi bond 1996 series.
Currently, the investors who had earlier subscribed to the deep discount bond and retirement bond of the flexi bond series of 1996 have two options before them:
- to redeem the bonds
- to shift their funds to the Suvidha scheme (a fixed deposit scheme)
For investors, it makes sense to go for the fixed deposit (FD) scheme rather than redeem the instrument, as the FD scheme offers 25-30 basis points above the usual bank deposit rates, which are currently quoting between 8%-10.5% for similar maturity profile. As the scheme comes under the section 194 A of Income Tax Act, tax exemption on the interest earned is applicable up to a maximum sum of Rs 5,000.
According to IDBI officials, IDBI is paying a 25-30 basis points higher interest on the deposits as a `loyalty premium' to the investors, subscribing to the deposit scheme. By exercising the call option, IDBI will save over Rs 1 bn worth of interest cost per annum. The purpose behind exercising the first call option is to cut cost.
The flexi bond 1996 offered investors 1.5% above the coupon rate of last issue of 10 year central government bond (10 year paper is quoting at 11.2%) or 2.5% per annum above 3 year fixed deposit rate offered by State Bank of India.
The Suvidha scheme offers deposits of three maturity slabs - one, three and five years - with interest being compounded quarterly. The one-year deposit carries an interest rate of 9%, three-year deposit a rate of 10% and five-year deposit a rate of 10.5%.
The yield on five-year deposit will work out to 10.92% since the interest is quarterly compounded. The investors will also get an option to redeem these deposits after maturity.
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