Gold mines come in different shapes and sizes. It can be prime real estate bought at a rock bottom price many years ago. Or shares that multiply in value within a few years. For Feroz Khan, an engineer with the Steel Authority of India, it was in the form of a bond issue by the Sardar Sarovar Narmada Nigam Ltd (SSNNL) in November 1993. The 20-year deep discount bonds were issued at Rs 3,600 each and promised to give an investor a mouth-watering Rs 1.11 lakh on maturity in 2014. Since November 1993, the Nifty has risen from 842 points to around 4200 now. But this phenomenal growth of close to 13% a year is beaten hollow by the 18.5% yield from SSNNL bonds.
The party does not stop here. The yield is 18.5% if the investor holds them till maturity. But there are many who would want to buy these high-interest bonds. On 23 February, for instance these bonds were selling for Rs 53,000—an annualised yield of over 23% since inception.
Since this was a long-term bond, there were periodic exit windows for investors. A bond could be redeemed at the end of the seventh, eleventh or fifteenth years. But given the high rate of interest offered by the bond, few people want to exit. Only 6% of the bonds were redeemed in 2000.
The past 14 years have been a roller coaster ride for the estimated 4.5 lakh investors in SSNNL bonds. The high yield promised by the SSNNL started to pinch the PSU when interest rates dipped in 1999. That’s when stories started appearing in newspapers about how SSNNL may not be able to pay the maturity value. “Every week I got letters from brokers offering to buy my bond. They used to attach photocopies of news items,” says Khan.
In May 2004, SSNNL dropped a bombshell when it announced its decision to pre-pay the deep discount bonds. The move would have saved the PSU Rs 6,100 crore in interest costs. Within a week, the price of an SSNNL bond crashed from Rs 40,200 to around Rs 25,500— very close to the promised yield.
At a meeting of investors called by the PSU, bondholders rejected the buyback plan outright. When the SSNNL tried to push its way through, the investors moved court. After a six-month-long legal tussle, the Delhi High Court ruled in February 2005 that the SSNNL must pay the sum on maturity. The ruling pushed up the secondary market price of the bonds from Rs 31,000 to Rs 36,000.
But there remains a big question mark on the bond. “The bond is guaranteed by the Gujarat government but there is still an element of uncertainty. What if the Gujarat Government goes to court and is allowed to stagger the payment over five or six years as in the case of US-64,” says financial consultant Surya Bhatia of Asset Managers.
Should investors hold the bonds till maturity? Khan and many other investors don’t want to sell. However, they should keep in mind that the interest earned from the bond is to be added to the bondholder’s income for the year and taxed at the relevant slab
If the bond is held till 2014, it will give an annualised yield of about 11%. “Investors will be better off by selling the bond right now and investing the proceeds in safer avenues,” advises Manoj Arora, regional head for institutional sales at Allianz Securities. Bhatia points out that the bond’s credit rating has recently been downgraded.
While that may be true, investors should note that the recent rise in interest rates is a temporary phenomenon. In the short term, interest rates may rise further as the RBI tries to control inflation. But in the longer term of 5-6 years, they are likely to come down. That will again cause bond prices to shoot up. And the Sardar Sarovar party will resume.
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