Recently, bondholders of Industrial Finance Corporation of India (IFCI) and Infrastructure Development Finance Company (IDFC) received mails from a Delhi-based investment management firm, Lotus Securities.
The crux of these mails was that the firm offered an ‘exit’ option to bondholders. If they had an immediate cash-flow need, bondholders could sell these bonds to Lotus at a certain discount and the payment would be processed in single day, says Lotus.
Moneycontrol contacted Lotus through its e-mail ID and asked why bonds were being purchased at a discount, when they quoted at higher rates on the exchanges. In response, Lotus said, “The bonds are very thinly traded or not traded. Investors need immediate liquidity requirement for various reasons during the COVID-19 pandemic. Investor (can) always try getting better service and price at other places and if not satisfied, avail our assistance (sic).”
Lotus also clarified that it was not associated with the issuer company and that its communication may be ignored if the investor wishes to hold the bonds till maturity.
But when selling bonds, investors must also consider the yield-to-maturity with which the selling prices is arrived at.
“I was surprised when I saw this mail. I was concerned how this investment firm had got the details of my bond holdings,” says Partha Banerjee, an IDFC bondholder. Another bondholder, Sandeep Agarwal, also wanted to know how Lotus got his e-mail ID and knew that he held IDFC bonds.
In response, Lotus says that the details were provided by the issuer company as per provisions of the Companies Act.
What is section 94 of Companies Act?
As it turns out, section 94 of the Companies Act, 2013, allows a bondholder to access the register of (fellow) bondholders. IDFC First Bank confirmed to Moneycontrol that at Lotus’ request, the register of bondholders was shared for inspection under section 94.
The section 94 (2) of the Companies Act reads as follows:
“The registers and their indices, except when they are closed under the provisions of this Act, and the copies of all the returns shall be open for inspection by any member, debenture-holder, other security holder or beneficial owner, during business hours without payment of any fees and by any other person on payment of such fees as may be prescribed.”
Section 94 (3) states, “Any such member, debenture-holder, other security holder or beneficial owner or any other person may take extracts from any register, or index or return without payment of any fee; or require a copy of any such register or entries therein or return on payment of such fees as may be prescribed.”
Sale closer to maturity not advisable
Lotus has given IDFC bondholders time till October 30, 2020, to accept its offer. Incidentally, tranche 1 (series 1-4) bonds issued by IDFC are maturing on November 12, 2020.
In its maturity notice to bondholders, IDFC First Bank has included an advisory for bondholders, stating that it has not appointed any agents or representatives and bondholders are “advised to be cautious” when dealing with such agencies.
In another communication, the bank advised bondholders not to trade or sell bonds ahead of the maturity date to any intermediary. “As the maturity date is so close, it is unlikely that the trade will be in your favour,” the bank has informed bondholders.
IFCI too has taken steps to caution bondholders. In its response, the company said that it had sent a cautionary e-mail to investors of “Infrastructure Bonds Series II (whom Lotus Securities is currently targeting), whose email IDs are available in our records.”
Even market regulator Securities and Exchange Board of India has been apprised of it by IFCI through “a letter and personal meetings." Incidentally, the IFCI bonds quoted above mature on January 31, 2021.No remedy for now
If you are a bondholder, and thinking how your investment details or contact details can stay private, there is little you can do right now. Unless the law is tweaked, legal experts say investment firms can get details of bondholders, if they too have investments in these bonds.
“An entity is entitled to inspect this information in the capacity of a bondholder, but not in the capacity of an intermediary such as a broker or an investment firm. This is a requirement of the law and the statutory provision will override any contractual commitments that contradict the statue,” says Ajay Shaw, partner, DSK Legal.
There is nothing illegal about Lotus getting other bondholders’ email IDs. But you must be cautious if you wish to sell your bonds before maturity through such intermediaries.