L&T Finance is making an early redemption of seven series of non-convertible redeemable preference shares (NCRPS) worth Rs 875 crore. These instruments with a tenure of 3-4 years, which were not converted to equity and paid a tax-free dividend, were popular with rich investors and family offices and several series were issued on a private placement basis in 2019.
These NCRPS, from AAA-rated entities, were an instant hit with high net worth individuals as they earned a tax free dividend of 7.5 to 8 per cent and the minimum ticket size was Rs 10 lakhs. With dividends being tax free in the hands of investors, the post tax return of 8 per cent was far superior to competing products like tax free bonds or fixed deposits.
“In view of the future outlook and the liquidity available with the Company, its growth targets and prospects, cost of capital, growth, capital adequacy and strategy, the intention of the Company is to repay and redeem the NCRPS in accordance with applicable laws. Further, with the change in dividend tax laws, the Company believes it is beneficial for the investors from a taxation perspective to redeem the NCRPS prior to its maturity date,” said L&T Finance in a communication with unitholders.
Financial planners say with dividend being taxable in the hands of the investor now, the instrument has lost appeal with rich investors. Those in the highest tax bracket could end up paying a 42 per cent tax, thereby reducing their post tax interest to just 4.25- 4.6 per cent. This has led to lack of interest from both issuers and investors.
“Changes in accounting standards under IND-AS have classified NCRPS as debt of the issuer, while for an investor change in taxation laws have made dividend income taxable in the hands of the investors thus making it un favourable for both parties,” says Nitin Shanbhag, Head – Investment Products, Motilal Oswal Private Wealth. Shanbhag believes investors could vote in favour and move out of these NCRPS and deploy the proceeds in a mix of debt funds & fixed income instruments, including REITs and InvITs in line with their debt allocation.
The pandemic is another reason why many AAA corporates want to keep their balance sheets lean.
“There are not many good lending opportunities in the pandemic and highly rated corporates want to keep their balance sheet lean in such times. Paying this off works well for both stakeholders,” said the CIO of a domestic fund house.
All these NCRPS will mature from the period November 2022 to December 2023. All the different series will have a separate buyback prize and L&T will pay an average premium of 5.29 per cent on the issue price of Rs 100. Investors in each series will have an opportunity to vote on this proposal, and the final call will be taken , subject to approval of three fourths of unitholders.