Insurance giant Life Insurance Corporation of India’s investment committee today passed the resolution to purchase Non Convertible Debentures (NCD) worth Rs. 1,850 crores of Reliance Capital, Reliance Infra and JSW Steel. NCD is defined as a debt product which cannot be converted into equity shares of the company as against the Convertible Debentures and also bears a higher interest rate than the convertible debentures.
LIC, which used to subscribe to the Initial Public Offerings (IPO) of the state owned companies, have started purchasing debt instruments of the private companies.
This is done at the time when both Indian and world market is affected by the recession and banks are struggling with liquidity crisis.
LIC will purchase the NCD’s as under:-
Rs. 500 crores NCD of Reliance Capital bearing a coupon rate of 10.80% and bullet redemption at the end of 5 years;
Rs. 600 crores NCD of Reliance Infrastructure bearing coupon rate of 11.75% for a period of 8 years;
Rs. 750 crores NCD of JSW Steel bearing interest rate of 11% having maturity period of 10 years
Investment by LIC in these NCDs will make it earn a return of 11% for a time frame of 5 – 10 years.
According to analyst, subscribing to the debt fund of the corporate is a better investment option as it gives higher return (ranging from 10 – 14%) and at the same time it is fully secured. However, the only negative side of this is that interest earned is taxable under income tax act as against the dividend income which is exempt in the hands of share holders.
