Siyapatha Finance ups return rate on debentures following tax exemption removal

Siyapatha Finance PLC, a fully owned subsidiary of Sampath Bank PLC said it would offer an additional 50 basis points return on top of the 12 percent it earlier promised for its subordinated debenture, which will open for subscription today.

Siyapatha Finance PLC earlier announced to issue 5-year subordinate debentures to raise Rs.1.0 billion at a fixed coupon of 12 percent but a few days later the finance company said it had revised the rate to 12.50 percent “payable annually.

Sri Lanka’s new Inland Revenue Act, which was passed in parliament a fortnight ago, lifted the withholding and income tax exemptions applicable on listed corporate debt.

Hence, all individual holders of listed corporate debt will become liable for a 5.0 percent withholding tax as final tax and other institutions such as clubs, associations, financial institutions and corporates have been made liable for income tax at the rate of 28 percent on top of the withholding tax. But tax credits are available.

Sri Lanka in 2013 exempted withholding tax and income tax on listed corporate debt to encourage corporates to list more debt in a holistic plan to develop the capital market.

But the new development has left the issuers as well as the investors in quandary as the post-tax returns may not be as attractive as it did earlier.

However, the issuers such as Siyapatha Finance will have to price their debentures accordingly to compensate for the additional tax cost the investors are now compelled to incur.

Siyapatha Finance in the term sheet issued few days before the revision in the yields were announced said, “in the event of any income tax being payable by way of withholding on the interest on the debentures and an interest rate gross up event is applicable, the company shall gross up the rate of interest such that a debenture holder receives an interest of 12.00 percent p.a. after the deduction of such withholding tax provided however that the interest so grossed up shall not exceed twelve 12.63 percent p.a. When interest is grossed up, the grossed up rate shall apply to all the debenture holders”.

Explaining the ‘interest rate gross up event’, the company said that withholding tax is payable in terms of law on the debenture interest payment but tax credit is not available to the withholdee being a company incorporated in Sri Lanka on such tax withheld under the relevant income tax statute.

The debenture is rated at ‘BBB+’ by Fitch Ratings.