After Blue Dart came up with a bonus debenture scheme late last year, NTPC, announced that existing shareholders would be rewarded with bonus (read free) debentures.

According to the scheme document, the face value of each debenture will be ₹ 12.50. The interest will be 50 basis point higher than the average government security ( G- Sec) rate. For example, if the average G- Sec rate is 7.7 per cent, the debenture holder will get 8.2 per cent each year for the entire tenure, which is 10 years.

The investor will get the capital back in parts. The first tranche will be ₹ 2.50 each debenture after eight years, then ₹ 5 in the ninth year, and ₹ 5 in the 10th year. Without an investment of a single rupee, the investor will earn interest and receive capital from the company.

Sounds tempting? If an existing shareholder, it is additional income and of great value. But if you would need buy NTPC shares to benefit, the answer is not that simple.

For those who are not existing investors, it makes sense only if they believe the company stock is attractive at the current levels. The motive of the scheme is to reward existing shareholders.

The shareholders will get 125 debentures for every 100 shares, as the ratio of bonus is 1: 1.25. On Tuesday's closing price of ₹ 139.10, investors will need to spend ₹ 13,910 to buy 100 NTPC shares and this will fetch them debentures worth ₹ 1,250. If the interest rate comes to, say, 8.2 per cent, the investor makes ₹ 102.5 every year on his or her investment.

After NTPC announced the bonus on December 23, its stock has seen volatility. The company's stock jumped 2.88 per cent compared to the previous day's close and closed at 142.8 apiece on the day of announcement. Five trading sessions later, it further went up to ₹ 144.1 a share. Thereafter, it has been falling consistently.

A company uses bonus debentures over dividends because the latter attracts dividend distribution tax. The interest the company will pay can be claimed as expense. This is also preferred over bonus shares, which dilute the equity of the company.  The borrowing cost comes down for the company if it raises money via this instrument.

He also feels this scheme is good for shareholders as it is very difficult for them to have a direct exposure to high grade papers from corporate such as NTPC.

If you are unsure about buying NTPC shares or you first want to know the interest the company is offering, there could still be an opportunity for you. To enable liquidity for investors, NTPC has said these debentures will be listed on stock exchanges after the issue closes. You can buy from the exchange. When Blue Dart listed its papers, many mutual funds sold off the debentures.

However, before you buy, evaluate the returns and taxation on these debentures vis- a- vis other debt instruments such as bank and company deposits. The interest component of these papers are clubbed with your income and taxed according to your slab.

If you get these debentures as bonus because you are a shareholder, the capital you get in the eight, ninth and 10th year will attract long- term capital gains as these are listed securities. If you buy it from the exchange and hold it until maturity, there won't be any tax on the capital deployed.