BEXIMCO has been granted authorization by the Bangladesh Securities and Exchange Commission (BSEC) to issue zero coupon bond worth Tk 1,500 crore on April 3, 2024. From the total amount of Tk 1,500 crore, a significant portion of Tk 1,000 crore will be allocated towards providing a loan to Sreepur Township Limited. This loan will be used to develop the Mayanagar Project. The remaining Tk 500 crore will be utilized to repay the existing bank loans of BEXIMCO.
IFIC Investment Limited has been appointed as the arranger, while Sandhani Life will serve as the trustee for this bond. This bond is unsecured, redeemable, and non-convertible. The bond offers a significant monthly return of Tk 1,250 per lakh, with a discount rate of 15%. An investment of Tk 1,00,000 will yield a total return of Tk 1,75,000 after 5 years, which includes the principal amount.
Let’s say you purchased a coupon bond with a face value of Tk. 1 lakh and a maturity period of 5 years. The bond has a coupon or interest rate of 15%. Therefore, you will receive 1,00,000×15% = Tk 15,000 per year or 15,000÷12 = Tk 1,250 per month. And when it matures, you will get back the face value of Tk 1 lakh. The cash flow of the 5-year coupon bond is identical to that of BEXIMCO’s 5-year zero coupon bond. So, the question arises as to why BEXIMCO presents it as a zero coupon when it is essentially identical to a coupon bond.
Investment in zero coupon bonds is fully tax-exempt under the 6th schedule of the Income Tax Ordinance, 1984, except for banks, financial institutions, and insurance companies. Therefore, it presents an attractive opportunity for investors with substantial wealth and NRBs.
For those who may be unsure about the monthly coupon, it’s worth mentioning that it is not a coupon. Zero coupon bonds are debt securities that are sold at deep discounts to face value. They don’t pay periodic interest payments, but when they reach maturity, the bondholder receives the face value of the bond. In Bangladesh, most investors lack the patience to hold money for long. To assure consistent cash flow for investors, zero coupon bonds in our country are designed in such a way that when you subscribe, you get a series of bonds with varying maturities. The bonds are issued at a discount and redeemed at maturity at face value. For example, a 5-year bond with semi-annual payments indicates that you are purchasing a series of bonds rather than a single bond. The first bond in the series will mature in 6 months, while the last will mature in the 5th year, thus ensuring regular cash flow for investors.
Some might believe that a zero-coupon bond satisfies Shariah requirements because it doesn’t pay interest. However, as per the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), they are not Shariah-compliant. The redeemable value at maturity exceeds the purchase price; thus, it is considered an interest-bearing instrument. Not even BEXIMCO claimed that it complied with Shariah. Since the corporate bond market is still new, potential trust issues with issuers may arise.
