The Hindu Business Line : How funds flow when a project lies at the horizon

Small wonder, whatever equity is there, it comes from promoters and not from the public. Witness the mothballed Dabhol Power Project, now stirring back to life.

Indian financial institutions, notably IDBI, have huge exposure by way of debt to the project.

While development financial institutions bankroll such projects, one also comes across contributions from suppliers both in the form of loan and equity.

Convertible debentures are a good option because it keeps the investors in good humour with periodic interest handouts till the debentures are converted.

But with such projects' gestation stretching, investors interest tends to wane even if the instrument is convertible debenture. Commercial banks are flush with funds. Takeout financing can bring in this money for such projects.

The idea is, commercial banks which cannot lend long-term can do it in relays. For example, a 20-year loan can be handled by four banks in succession.

The first bank would be paid off after five years by the second and the second would be paid off after another five years by the third, and so on. This then converts the long-term loan into short-term as far as the individual banks are concerned.

But there is no sharing of risks. The buck will stop with the bank holding the loan when the project goes bust.

Recap bonds

WHAT are recapitalisation bonds?

Mamta Ghai, email

This term has special significance in the context of banks, especially nationalised ones. The Government often has to pump in more capital into these banks as bulk of it gets unrepresented by real assets in view of accumulated losses chiefly arising out of bad debts.

But with the Government's own fisc being in a perilous state, it is often constrained to issue bonds in lieu of cash. Thus the banks' capital base gets shored up but not their coffers. That would have to wait till the maturity of these bonds.

Some call this jugglery and some just plain farce. But it happens when the investor himself is strapped for cash.

`Junk' question

WHAT exactly is junk bond?

T. S. R. Jagannatha Rao, Hyderabad

Junk bonds are those which are way below investment grade instruments — the ones Standard & Poor or Moody's if you like won't touch even with a bargepole.

Typically, they offer a much larger interest than the prevailing market rate for similar maturity to compensate for the high risk the investor undertakes by investing in such bonds.

Offer of such bonds signifies the growing desperation of the issuing company. This often happens on the back of refusal by banks to keep their taps flowing into the bottomless coffers of their clients. Investors in these bonds naturally are those with tremendous appetite for risks.

In our own country, people do invest in junk bonds without knowing what they are investing in is indeed junk.

Depositing with plantation companies and jewellers, tantalised by the promise of mind boggling 36 per cent interest per annum not long ago is a typical example of this ignorance.

The driving force of course was greed and not appetite for risks. And as far as the borrowers were concerned deceit rather than desperation was their motive.

Bank income

WHY are there special norms for income recognition by banks?

Mamta Ghai, email

Banks and financial institutions are in the business of lending money. The nature of their business warrants special, if lenient, norms for income recognition.

Loans sometimes turn sticky with the borrowers refusing to pay up. It would be unwise to take credit for interest accrued on such loans ignoring the reality as to their recovery.

This is infinitely better than taking credit anyway and then making amends by making provision for bad debts in a manner of double-take.

Islamic banking

I AM a student of commerce. The term 'Islamic banking' keeps doing rounds in investment magazines. What is it?

Nitya Shashindaran, Kochi

The shariat frowns on usury. Islamic scholars have interpreted this to mean peremptory ban on money-lending itself albeit on reasonable terms as opposed to usury. Several Islamic nations have embraced this form of banking and the banks are not essentially owned or controlled by Muslims.

The practice has more to do with respecting the sentiments of a sizeable community. So, instead of lending and charging interest, what banks do is to buy the asset and lease it or hire it.

So much so, what the bank earns is not interest but profit. One may dismiss of the whole thing as cosmetic but each to his own. The truth is banks cannot obviously do charity. They have to earn their reward for the services rendered.

Snared in shares

I AM holding shares of Modern Syntex (I) Ltd, a textile unit with strong brand name of `Modern Suitings' few years back. To my knowledge the unit was in operation in Rajasthan.

But, of late, the share has been delisted from the Bombay and National stock exchanges. Are the shares traded on any of the stock exchanges in India. Is the company still in existence? If not what can I do with my equity holdings for encashing?

Alex Paul, email

Maybe it was listed in the Jaipur Stock Exchange. But the truth is except for the two exchanges cited by you, others have more or less become moribund.

You may write to the market watchdog SEBI. It has a list of vanishing companies. But such companies can be upbraided only for mala fides. It is possible that your investment has turned dud owing to supervening events such as competition from abroad, and so on.

There is no exit route for those owning the equity of companies whose shares are not traded and the investor/trader apathy is due to poor fundamentals of the company.

The moral of the story is one should not sit on one's investments — they should be watched over constantly and churned if necessary. Timely axing of deadwoods and replacing them with active ones is the key to success in the weird place called the stock market.

TI to GTI

I READ that the basis of filing returns has been shifted from total income to gross total income. I have gross income just over Rs 1,40,000 but taxable income of only Rs 60,000 (as I have invested in tax-free relief bonds). In addition, Sections 80L and 80U reduce it further to nil. Am I required to file returns for FY 2004-05?

Deepak Srinivasan, e-mail

The new norm for filing return — gross total income instead of total income being the touchstone — comes into force from the next assessment year 2006-2007.

For financial year 2004-2005 you can file the return on the basis of total income — if your total income is in excess of Rs 50,000 you have to file a return; else not, unless you come under the purview of the one-by-six scheme.

But your question is not clear when it says your taxable income is Rs 60,000 but after the deductions it is reduced to nil. Moreover, investment in tax-free Relief Bonds does not confer you any deduction from gross total income of the principal amount or any tax rebate under Section 88. What is tax-free is the interest part.

Mother's returns

MY mother's only source of income is interest, which is normally less than Rs 1 lakh a year. She has a telephone in her name. Does she have to continue to file income-tax return as hitherto?

Suresh, e-mail

For just this year, for from assessment year (AY) 2006-2007, the threshold for filing return is GTI of Rs 1 lakh; and telephone vanishes from the one-by-six criteria for filing return if below the GTI of Rs 1 lakh from that year.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

S. Murlidharan

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