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Private bonds, or private placement bonds, are those that are issued to select investors or institutions. This is the exact opposite of public placement bonds. Therefore, in the case of private bonds, the company does not need to file the offer document with the Securities and Exchange Board of India (SEBI) for issuing the bond. Such bonds save a lot of effort on the part of the company due to lower paperwork. However, private bonds are regulated by the SEBI.
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| Name | Issue Size | Maturity | Coupon |
|---|---|---|---|
| NTPC Limited | 140.00Cr | 06 Nov 2023 | 11.25 % |
| Kotak Mahindra Prime Limited | 40.00Cr | 22 Jun 2023 | 10.50 % |
| Poonawalla Fincorp Limited | 15.00Cr | 06 Jan 2027 | 10.40 % |
| Poonawalla Fincorp Limited | 35.00Cr | 07 Dec 2026 | 10.40 % |
| Poonawalla Fincorp Limited | 25.00Cr | 24 Jan 2027 | 10.40 % |
| Poonawalla Fincorp Limited | 15.00Cr | 03 Mar 2027 | 10.25 % |
| Poonawalla Fincorp Limited | 5.00Cr | 06 Jun 2025 | 10.20 % |
| HDB Financial Services Limited | 100.00Cr | 17 Oct 2023 | 10.20 % |
| HDB Financial Services Limited | 80.00Cr | 18 Mar 2024 | 10.19 % |
| Tata Capital Financial Services Limited | 100.00Cr | 26 Sep 2024 | 10.15 % |
All You Need To Know About Private Bonds
Who Issues Private Bonds?Benefits of Private BondsDrawbacks of Private BondsHow to Calculate Yields of Private Bonds?How are private bonds taxed?Who Should Invest in Private Bonds?Who Issues Private Bonds?
Generally, private corporations issue these bonds as the compliance formalities are relatively easier. As it is available for select investors, it can be structured according to the needs of investors. According to the Income Tax Act of 1961, “While adopting the private placement route to issue the bonds, each entity shall adopt the book building approach except for those mentioned in sub-paragraph (2) except as per regulation II of the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations 2008, wherein bids shall be sought on the coupon rate subject to a ceiling specified by the entity and the allotment shall be made at the price bid.”
Sub-paragraph (2): “The issuers shall earmark suitable amounts within their private placement allocation for placing with Sovereign Wealth Funds, Pension and Gratuity Funds without the requirement of book building procedure:
Provided that in the event of any non-response, the issuers shall be free to offer the un-subscribed amount through book building route under private placement in the domestic market.”
Benefits of Private Bonds
Private bonds have several benefits, as discussed below:
- The company can save time and effort due to lower paperwork requirements.
- Although the SEBI regulates these bonds, the company does not need to file offer documents.
- These bonds are issued to select investors. They also need higher compliance formalities. Hence, the structure of these bonds can be highly customisable.
Drawbacks of Private Bonds
As every coin has two sides, so do private bonds. Below we have listed a few drawbacks of private bonds:
- The default risk can be higher due to the lower compliance involved.
- Researching these bonds can be challenging as no offer document is filed with the SEBI.
- Liquidity can be a concern for these bonds, as they are issued only to select investors.
How to Calculate Yields of Private Bonds?
A yield is a number that shows the returns of any bond. Many times it is referred to as Yield to Maturity (YTM). You receive interest payments based on the coupon rate. You can calculate the YTM using the below formula:
YTM = [Annual Interest + {(FV - Price)/Maturity}]/[(FV+Price)/2]
Where,
YTM = Yield to Maturity
Annual Interest = Coupon payment that you receive annually.
FV = Face Value
Price = Current Market Price of the Bond
Maturity = Number of years left till maturity
Let’s take an example to understand it better. Assume you invest in a bond having the following characteristics:
| Particulars | Values |
| Face Value | ₹1,000 |
| Annual Coupon Rate | 7% |
| Annual Interest Payout | ₹70 |
| Time to Maturity | 5 years |
| Current Market Value of the Bond | ₹850 |
So, if we plug in all the values in the above formula, the YTM for the bond in the example works out to be 10.8%:
YTM = [70 + {(1000-850)/5}] / [(1000+850)/2]
However, if we change the bond's current market value to ₹1,100, the YTM is 4.8%. From this, we can understand the relationship between YTM and bond prices. As and when YTM increases, bond prices decrease and vice versa.
However, a lot of people often confuse YTM with coupons. A coupon is a predetermined rate when you buy the bond, while the YTM is the prevailing market rate of the bond.
How are private bonds taxed?
Private bonds are taxed similarly to other debt securities excluding tax-saving bonds. Any interest the investors earn on the private bonds is taxed as per the individual tax slabs.
Any period above 36 months is considered long-term for private bonds. Hence, those gains arising before the 36 months are deemed Short-Term Capital Gains (STCG). Else, it is regarded as a Long-Term Capital Gains Tax (LTCG).
In the case of STCG, the gains are added to the investor’s income and taxed as per individual tax slabs. Whereas in the case of LTCG, gains are taxed at 20% without indexation benefit, plus any surcharge. This is because these are unlisted bonds. Moreover, even the Tax Deducted at Source (TDS) of 10% applies.
Who Should Invest in Private Bonds?
For those looking who wish to take additional risk than fixed deposits, for those extra returns can invest in private bonds. Moreover, those not concerned about credibility can invest in private bonds, although SEBI regulates them. Moreover, the minimum face value, as prescribed by SEBI, is ₹1 lakh for private bonds, while the same is ₹1,000 for public bonds. However, a fixed deposit is sensible if you are looking for a safer option.