INDIAN STATE COMPANY BONDS PROVOKE COMPLAINTS
India's private businessmen say they
have been placed on an unequal footing in raising money from
the capital market because government companies are wooing
investors by issuing more attractive tax-free bonds.
    Stock brokers and bankers polled by Reuters said although
equity shares or debenture issues floated by private firms
provide a higher return and shorter maturity, they are fast
losing their popular appeal as they are liable to both wealth
and income taxes.
    Brokers said many investors are transferring funds into
government company bonds because of their tax-free status and
easy transferability.
    About 100 private companies have postponed plans to issue
equity shares and debentures in the first quarter of fiscal
1987/88 partly on account of fierce competition from public
sector bonds, a merchant banker said.
    They included equity shares and rights issue worth one
billion rupees planned to be issued this month by Tata
Fertilisers Ltd, he said, adding the issue has been postponed
indefinitely.
    "The government bonds are making serious inroads on the
private sector companies' resources," said R. P. Goenka,
president of the Federation of Indian Chambers of Commerce and
Industry.
    "The discriminatory tax treatment should be done away with
and equal facilities be provided to the two sectors to mobilise
resources from the market which is common to both," Goenka said.
    A senior Finance Ministry official said government and
private firms were free to compete to raise resources, adding
it was not correct that public sector-issued bonds were
preventing private firms from raising money on the stock
market.
    "Debentures and equity shares floated by private companies
still account for at least 60 pct of total capital raised in
stock exchanges," the ministry official said.
    A spokesman at Bombay stock brokers Batliwala and Karani
said government bonds were valued at about 20 billion rupees or
about 40 pct of 50 billion rupees raised by both government and
non-government firms in the domestic capital market in 1986/87.
    The share was 35 to 40 pct of about 36.95 billion rupees
mobilised in 1985/86, he said. "To save taxes, commercial banks,
mainly foreign banks, and some private companies, are investing
their surplus funds in the tax free bonds," he said.
    "Individuals who are very well off are also investing in the
bonds to gain tax benefits while only small investors are going
for equities or debentures floated by private companies on a
selective basis," the spokesman said.
    The maturity period of government company bonds varies
between seven and 10 years. No wealth or income taxes are
payable on nine pct seven-year bonds but those carrying 13 pct
interest on 10-year bonds are subjected to income tax if interest amount^M
exceeds 7,000 rupees a year.
    Equity shares, the 14 pct non-convertible debentures and
12.5 to 14 pct convertible debentures issued by private
companies are not exempted from either the wealth tax or from
the tax on income earned from them.
    The government bonds are listed as securities but traded on
India's four major stock exchanges. They can be sold freely on
the stock market by simple endorsement while debentures can
only be sold to the company after one year, brokers said.
    Government companies are trying to capitalise on a boom in
the stock market since 1984/85 sparked by liberal tax
concessions and reforms in exchange operations, brokers said.
    The National Thermal Power Corp, NTPC, was the first
government company to issue the bonds to raise one billion
rupees in January last year, breaking the monopoly of private
companies on the capital market. The seven-year NTPC bond was
oversubscribed three times, brokers said.
    Official figures show bonds floated by government companies
have been heavily oversubscribed. More state companies have
sought the Ministry's permission to issue them in coming
months.
    NTPC's second bond issue at the end of 1986 raised 4.51
billion rupees against 1.2 billion originally permitted by the
Finance Ministry.
    The Mahanagar Telephone Nigam mobilised 3.83 billion rupees
last year against authorised 1.5 billion and last month the
Indian Railway Finance Corporation's record susbcription
totalled 5.5 billion rupees against authorised 2.5 billion.
    In most cases, the government has allowed the companies to
maintain the oversubscribed amount, brokers said.
    Goenka said that government bonds are making it
increasingly difficult for private companies to launch new
equity or debenture issues. He said the government could at
least "fix a suitable limit on the funds to be raised through
such bonds by the public sector."
    Merchant bankers said the government is pressing state
companies to borrow from the public by reducing financial
support to them.
    To ease its internal debt burden, the government has
reduced the budgetary support to development investment in
about 120 public sector companies to 69.92 billion rupees in
1987/88 from 77.92 billion a year earlier, official figures
show.
 REUTER
