Premature bond recalls become order of day

Premature bond recalls become order of day
George Mathew

MUMBAI, FEB 19: The fall in interest rates might have cheered the industry, but the investors are facing a dilemma. While the cost of funds has gone down on the one side, financial institutions are increasingly opting for premature redemption of bonds much to the chagrin of investors. The latest to recall the bonds for premature repayment is IDBI.

In fact, all the leading institutions were taking turns and making premature repayments to investors. IDBI, IFCI and ICICI had returned the funds of investors in the last one year, using the call option in the instruments. IDBI is now back again, recalling the Flexibond-2 series. "IDBI has exercised the call option... IDBI Deep Discount Bonds 97 will be redeemed by IDBI on April 30, 2001. No interest on the said bonds will be payable after April 30," it said in a notice to investors.

Said an investor, "if institutions are making premature repayments in two or three years, what's the use of putting money in such bonds. It has upset my investment plans. FIs should have considered the possibility of a fall in interest rates while floating the bonds." In their eagerness to mobilise maximum funds, institutions have been offering high interest rates, without giving a thought to the changing interest/market scenario.

ICICI had called back erstwhile SCICI Ltd's public issue of unsecured redeemable bonds aggregating Rs 500 crore in July-August 1996. As per the prospectus, the first date for exercising the call or put option was on March 1, 2001 as both bondholders and the company had the right to exercise early redemption option, it said adding the total amount being redeemed is about Rs 605 crore.

IDBI had earlier also redeemed its Flexibond issue much before its redemption date. It's not alone. UTI also closed down its Rajalakshmi scheme despite strong investor resistance. Reason: The fall in interest rate had made such instruments unviable for these institutions which had promised higher interest rate three or four years ago.

At the same time, institutions are also keen to retain the funds. ICICI was offering the eligible bondholders as an option to switch-over their existingholding into fixed deposits bearing special interest rates. IDBI also last year offered a deposit scheme for those investors exiting from the Flexibond series. IDBI, while issuing notice to investors for redemption last week, also entered the market with its Flexibond-10 series to mobilise fresh funds.

The Rajalakshmi Unit Scheme launched in 1992-93 by UTI was a plan for the under 5 girl child, which assured a maturity sum on attainment of maturity of the investee. By assuring the maturity amount, UTI had in a way assured the return which was based on calculations of 16% per annum. But UTI prematurely encashed this scheme. "In periods of falling interest rates it is not possible for us to continue to give a high return... so we have to recall the bonds," said an IDBI official.

Bank chiefs expect another round of bank rate cut after the budget. Bankers are now expecting a reduction in rates on some government-run savings schemes which will create an environment for further rate cuts by the central bank. "This means the interest rate scenario is yet to stabilise. One can expect more bond recalls in the coming weeks," said an analyst.