Table of contents
Have you ever found a 500 rupee note on the road? You picked it up and it was yours. Did you know that there is a type of bond that exists similarly?
Bearer bonds, known for their anonymity and ease of transfer, have a rich history spanning centuries. However, in the modern landscape, bearer bonds have become a rarity, with many countries imposing strict regulations or banning their issuance altogether.
In this blog post, we will delve into the world of bearer bonds, exploring what they are, whether they exist in India, and examining the pros and cons of these instruments.
What are bearer bonds?
Bearer bonds, sometimes referred to as “bearer instruments,” are debt securities in which the ownership of the bond is not registered in the name of the holder. Instead, whoever physically possesses the physical document is considered the owner of the bond.
One of the distinguishing features of bearer bonds is their anonymity. Unlike registered bonds, where ownership details are recorded in a central registry, bearer bonds lack an owner’s name on the certificate, providing a level of privacy and discretion for the bondholder.
When the bond matures, the holder is entitled to receive the face value of the bond, also known as the principal, along with any accrued interest.
Do bearer bonds exist in India?
In India, the issuance of bearer bonds was once relatively common, particularly in the form of government savings bonds.
Electoral bonds are a form of interest-free bearer bonds that exist in India. They can be purchased by companies or individuals in India only from State bank of India. Electoral bonds can be bought through a KYC-compliant account to make donations to political parties, which ought to be encashed in a given time.
Example of a bearer bond
Suppose, you acquire a ₹10,00,000 bearer bond issued by ABC Enterprises on January 1, 2020.
The bond has a tenure of 10 years, with its maturity date set for January 1, 2030. It carries an annual coupon rate of 6.00%.
Coupon payments are to be disbursed quarterly on January 1, April 1, July 1, and October 1, with the first payment due on April 1, 2020.
With the details provided, you can anticipate the following quarterly coupon payment:
Coupon Pay = Bond Face Value × Coupon Rate ÷ coupon payments/year
Coupon = ₹10,00,000 × 6.0% ÷ 4 = ₹15,000
Annually, this translates to ₹60,000 in interest income. If you hold the bond until it matures, you can expect to receive ₹6,00,000 in interest payments over the 10-year duration, in addition to the return of your initial ₹10,00,000 investment on January 1, 2030.
You must detach each coupon and present it to the issuer or their registered agent on or after each designated payment date. Similarly, to redeem the bond, you must submit the bond certificate to the issuer or their registered agent upon maturity.
Pros of bearer bonds
- Anonymity
Bearer bonds provide a high level of privacy and anonymity to bondholders, as there is no centralised record of ownership. This anonymity is attractive to individuals who value financial discretion.
- No registration hassles
Unlike registered bonds, bearer bonds do not involve complex registration processes. Holders of bearer bonds do not need to provide personal information or have accounts with financial institutions.
- Easy transferability
Bearer bonds are known for their simplicity in terms of ownership transfer. They can be transferred from one person to another by simply handing over the physical certificate, making them highly liquid instruments.
- Potential for higher yields
Due to their declining use, some bearer bonds may offer higher yields compared to registered bonds with similar maturities and credit quality.
Cons of bearer bonds
- Loss and theft
Bearer bonds are susceptible to loss or theft, and recovering them can be challenging without proper documentation. Losing a bearer bond means losing the associated funds.
- Counterfeiting
Bearer bonds can be vulnerable to counterfeiting. It can result in significant financial losses for investors.
- Limited liquidity
Bearer bonds may have limited liquidity in the secondary market.
- Regulatory scrutiny
Bearer bonds have attracted regulatory scrutiny due to their potential for misuse in activities such as tax evasion and money laundering.
- Declining acceptance
Bearer bonds are no longer widely accepted as a means of payment in day-to-day transactions. Their utility has diminished in the modern financial world.
Conclusion
Bearer bonds, once a significant part of the financial landscape, have faded into relative obscurity in many countries, including India. While they offer unique advantages like anonymity and ease of transferability, these benefits are outweighed by the risks associated with loss, theft, counterfeiting, and regulatory scrutiny.
FAQs
Bearer bonds in India, particularly electoral bonds, serve as a financial instrument for anonymous political donations. They are interest-free and can be purchased from authorized branches of the State Bank of India (SBI). The anonymity of these bonds allows individuals and companies to support political parties without disclosing their identity, which can protect donors from potential backlash or favoritism.
Bearer bonds were once common in India, offering a mix of security and anonymity. However, they have largely fallen out of favor due to risks such as loss, theft, and counterfeiting. While they provide ease of transfer and anonymity, these features also make them susceptible to misuse. Therefore, in the modern financial landscape, bearer bonds are not considered a good investment due to the associated risks and lack of transparency.
The main aim of the bearer bonds scheme, particularly the electoral bonds scheme, was to streamline political donations, ensuring donor anonymity while providing funds to political parties. This was intended to protect small donors and address concerns about large contributions potentially leading to quid pro quo arrangements. However, the scheme has faced criticism for reducing transparency in political funding.
Bearer bonds can be converted to cash by presenting them to the issuer or their registered agent. For electoral bonds, they must be encashed by the political party within a stipulated time frame at the SBI. If not encashed, the amount is transferred to the Prime Minister’s Relief Fund. In the past, special bearer bonds were introduced to convert unaccounted money into legitimate funds, providing a way to invest black money with immunity from tax investigations.
Yes, bearer bonds do expire. They have a set maturity date, upon which the holder is entitled to the face value of the bond along with any accrued interest. The holder must detach each coupon and present it to the issuer on the designated payment date. Upon maturity, the bond certificate must be submitted to the issuer or their registered agent to redeem the bond’s value.
Leave a Comment