PSU Bonds

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These are long term debt instruments issued by Public Sector Undertakings (PSUs). The term usually denotes bonds issued by the central PSUs (ie PSUs funded by and under the administrative control of the Government of India). The issuance of these bonds began in a big way in the late eighties when the central government stopped/reduced funding to PSUs through the general budget. Typically, they have maturities ranging between 5-10 years and they are issued in denominations (face value) of Rs.1,000 each. Most of these issues are made on a private placement basis to a targeted investor base at market determined interest rates. Often, investment bankers are roped in as arrangers for these issues.

 

These PSU bonds are transferable by endorsement and delivery and no tax is deductible at source on the interest coupons payable to the investor (TDS exempt). In addition, from time to time, the Ministry of Finance has granted certain PSUs, an approval to issue limited quantum of tax-free bonds ie bonds for which the payment of interest is tax exempt in the hands of the investor. This feature was introduced with the purpose of lowering the interest cost for PSUs which were engaged in businesses which could not afford to pay market determined rates of interest eg Konkan Railway Corporation was allowed to issue substantial quantum of tax free bonds. Thus we have taxable coupon PSU bonds and tax free coupon PSU bonds 

 

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