Sujoy and Minnie, two working professionals met up over Teams, to share notes on their investments.
Sujoy: Hi Minnie! How are you spending your time?
Minnie: Mostly on the Cowin app, trying to get a slot. And, there’s my first love – playing the markets.
Sujoy: Nowadays it’s easier to make money on the markets than book vaccine slots, I must say. I called for a very specific thing, Minnie. I read somewhere that Britannia, the cake and biscuit company is issuing bonus debentures. I know it’s a solid company, so how do I invest in them?
Minnie: A bonus debenture issue, unlike a normal one from a company, isn’t open to the public. Britannia is issuing these debentures to its existing shareholders only. For every Britannia share, they’ll get one free bonus debenture.
Sujoy: Oh, the free part sounds good, but how is this different from dividends or bonus shares?
Minnie: When a company pays out a dividend, it simply distributes a part of its retained profits to its shareholders. In bonus issues, it issues free shares against equity already held. In the case of bonus debentures, the company issues free bonds to its shareholders. It promises to pay regular interest and the principal at maturity. In Britannia’s case, if you held 10 shares, you will get 10 debentures of face value of ₹29 each. You will get interest at 5.5 per cent (of ₹29). At the end of 3 years, you will get ₹290.
Sujoy: But in a normal bonus issue, I would get Britannia shares which add to my long-term portfolio and returns!
Minnie: When you get bonus shares, their value may go up or down over the years. But here, you are getting an assured return. I agree that the benefit however, is much smaller. Against a Britannia share of over ₹3400 apiece, you are getting a bonus debenture worth ₹29 and an even smaller interest on it.
Sujoy: Why do companies do this?
Minnie: Britannia’s intent is to reward shareholders. Instead of paying dividend at one go, it now gets to retain the money for a few years and use it for expansion or to repay debt. In a normal debenture, Britannia would pay interest to outsiders. Here, it converts part of its retained profits into debt and pay interest to its own shareholders. Plus, interest is tax deductible.
Sujoy: Then why don’t more companies do it?
Minnie: Well, a few have – HUL, NTPC and Britannia. But the issue of bonus debentures is complicated requiring a scheme of arrangement, NCLT approval etc.
Sujoy: So net-net I can’t buy these debentures?
Minnie: These will be listed on the bourses. If some shareholder sells, you can grab them!