Mumbai: A clutch of non-bank lenders are planning early redemption of their market-linked debentures to ensure that the investors are not taxed at a higher rate since the preferential taxation for such instruments has been withdrawn from the next financial year, said two people aware of the discussions.
According to Union Budget announcement, come 1 April, the market-linked debentures, which are typically issued by small NBFCs rated A or below, will attract short-term capital gains tax, instead of 10% under long-term capital gains. This could lead to an increase in taxation to 30%.
“Investors in some of market-linked debentures have sought early redemption in order to avoid the higher tax proposed in the Budget. This will only be applicable to those that have completed the minimum holding period of 12 months and are eligible for long term capital gains tax,” said one of the people seeking anonymity.
Small non-banks and other issuers will have to bear the brunt of the revised taxation, they added.
According to Crisil, rated MLD issuances were at ₹11,000 crore in FY21; and ₹14,000 crore in FY22. In the first 10 months of this financial year, issuances were at ₹21,000 crore. That apart, according to its estimates, an additional ₹3,500-4,000 crore of unrated issuances happen every year.
“Access to debt capital markets for mid and small NBFCs is negligible, and investor appetite exists only for AA and higher rated issuers, categories that many of the mid and small NBFCs do not fall in,” said Krishnan Sitaraman, senior director and deputy chief ratings officer at Crisil Ratings Ltd.
Sitharaman said the borrowings of private sector NBFCs would be around ₹24 trillion and the contribution of MLD is very small. “There are some entities in the mid and small NBFC segment that are looking at MLDs as an additional resource mobilizing option.”
The issuance of market-linked debenture is therefore a way for the NBFCs to borrow from the bond markets. The investor profile typically consists of high networth individuals (HNIs) and family offices, instead of institutional investors in case of other bonds.
According to the Finance Industry Development Council (FIDC) data, around 150 issuers have raised ₹83,104 crore between 2018 and 2022.
The outstanding market for the MLDs is estimated to be ₹75,000 crore, with about 45% being listed as on 31 January. Out of this, debentures worth ₹3,800 crore will mature on or before March 2023.
In a letter to finance minister Nirmala Sitharaman on 15 February, the industry body sought retention of the long-term capital gains tax applicability if the holding period for listed debentures is more than 12 months.
“Nonetheless, if the same is not feasible and the parity of tax between equity instruments and MLDs is removed, our humble submission is to apply the provisions prospectively on new investments,” it said.
Mint reported on 22 February that following the Budget proposal, HNIs and wealth managers are rushing to sell their MLD holdings before 31 March to unsuspecting retail buyers.
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