Of late, several non-banking finance companies (NBFCs) have launched non-convertible debentures (NCDs) aimed at fixed income investors. NCDs are bonds carrying a fixed coupon rate of interest and can be secured or unsecured.
Currently, while most banks are offering around 7 percent a year over 3-5-10 year periods, NCDs are offering up to 9 percent or even higher for the same tenures. Among few such offers, that are either already launched or are in the pipeline are Tata Capital Financial Services, Aadhar Housing Finance, and Indiabulls Commercial.
Here we look at Tata Capital Financial Services’ maiden NCD offer to mobilise up to Rs 7,500 crore. It issue opened on September 10 and will close on on September 21.
In the Tata Capital Financial Services NCD Tranche I issue, the rate of interest that an investor gets will depend on two things: the category that he or she falls in and the tenure that one opts for.
Which category investor are you
As in all NCD issues, high net-worth individual investors (HNIs), i.e., resident Indian individuals and Hindu Undivided Families through the Karta applying for an amount aggregating to above Rs 10 lakh across all options of NCDs in the issue are put as Category III investors. While the retail individual investors, i.e., resident Indian individuals and Hindu Undivided Families through the Karta applying for an amount aggregating up to and including Rs 10 lakh across all options of NCDs in this issue are put as Category IV investors. Categories I and II relates to companies and institutions
Choice of tenure
The interest rate being offered is 8.8 percent, 8.9 percent and 9.1 percent per annum (payable annually in all tenure) over 3, 5 and 10 year tenure respectively. There is no other option such as monthly, cumulative, to take interest other than receiving it annually in any of the tenure options. Therefore, deicide the tenure based on the time that you are comfortable in locking in the funds.
Interestingly, there are no ‘put and call’ options in the NCD offer. This means that neither can an investor exit before maturity nor does the issuer have the right to redeem the debentures earlier than the maturity date.
First come, first serve basis
The various categories have been allotted specific portion of the issue. High net-worth individual category portion and retail individual category portion will be allocated NCDs up to 30% each of the overall issue size on first come first serve basis. On the date of oversubscription, the allotments will be made on proportionate basis.
The NCDs have been rated “CRISIL AAA / Stable”, “CARE AAA; Stable”. The rating indicates that instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk. However, this rating is not a recommendation to buy, sell or hold securities and investors should take their own decision. This rating is subject to revision or withdrawal at any time by the assigning rating agencies and should be evaluated independently of any other ratings.
Are NCDs secure?
Only the first two options, i.e., for 3 and 5 years tenure are secured NCDs, while the third option of 10- year falls under the unsecured nature of NCDs. In case of secured NCDs, the claims of the Secured NCD Holders shall be superior to the claims of any unsecured creditors as the former would constitute secured obligations of the company. The unsecured NCDs offered under this Issue are subordinated and are not secured by any charge on the assets of the company and will be subordinate to the claims of all other creditors. No security will be created for Unsecured NCDs in the nature of Subordinated Debt.
Trading of NCD
Although the NCDs have a lock in period, they can be traded in the secondary market to provide liquidity, however, actual trading is low. NCDs will be issued and traded compulsorily in dematerialised form because as per the SEBI Debt Regulations, the trading of NCDs can only be in dematerialised form. The NCDs shall be listed within 12 Working Days from the respective Issue Closing Date and BSE is the Designated Stock Exchange for this Issue.
The interest earned is to be added to one’s total income and hence it is entirely taxable as per the income tax slab. If the debentures are held in demat account, there will not be any TDS. However, in case of NCDs held in physical form, TDS will be there from interest payable on such if such interest exceed Rs 5,000 in any financial year. Investors, if eligible, may submit Form 15 G/H to avoid deduction of TDS.
As there’s no cumulative option, see how the investment in this NCD fits in your financial plan. An investor needs to reinvest the annual interest optimally and not let it go lying in the bank account every year. As NCDs for 3 and 5 year tenure are secured, it’s better to stick to them, if one has to invest in this NCD issue.
Further, bank deposits are insured up to Rs 1 lakh (including principal and interest) per bank, there is an implicit safety as government will not allow a bank to fail to pay up depositors. NCD, on the other hand, will have its own risk factors addressed through ratings and creation of secured chare against the assets. Ultra conservative investors should stick to bank deposits while others may consider investing in NCDs after carefully evaluating the company’s reputation, financials, ratings etc, before committing funds to them.
Should you invest?
Although, predicting interest rate movement, especially over the long-term is difficult, the current scenario signals a rise in interest rates. There could be several more offerings in the near future. The interest rate offered is competitive when compared to bank fixed deposits. Although the highest rating keeps the risk at bay, the ratings may change over time. One may, therefore, take some exposure in Tata Capital Financial Services NCD keeping these factors in mind.