The interest rates on Bank fixed deposits have been on the downward slope and the interest rates on popular small savings schemes like Senior Citizen Savings Scheme, Post office MIS etc., are not very attractive. Also, Tax Free Bond Issues are not available. This is inducing many small investors to look out for better fixed income products which can give decent rate of return.
This hunger for better yield is from all kinds of investors small, large, FIIs, domestic MFs etc., NCDs or Non Convertible Debentures are one of the fixed income options that can satiate investors’ hunger for better yield.
May be this is one of the reasons why the recent and latest NCD Public Issues have been fully subscribed from all category of investors on day one of the subscription period itself.
It has been estimated that NCDs worth around Rs 25,000 crore to hit Indian Debt market in this fiscal year (2016-17). Below are the recent and latest NCDs which have seen overwhelming response from the investors;
- Mahindra & Mahindra Financial Services came up with NCD public issue in May 2016. The interest rates offered were in the range of 8.44% to 9% depending on the tenure & category of NCDs. This issue was fully subscribed on day one itself and the issue has been over-subscribed by two times.
- Edelweiss Housing Finance came up with the latest NCD issue in the month of July and this was also fully subscribed on day one itself. The interest rates offered were in the range of 9.5% to 10% depending on the tenure of NCDs.
- The response to Dewan Housing Finance Corporation’s (DHFL) latest NCD issue (August 2016) has also been stellar. The interest rates offered were in the range of 8.74% to 9.3%.
List of upcoming & latest NCD Public issues
- SREI Infra’s latest NCD public issue is to be open from 7th September, 2016 to 28th September, 2016. These NCDs are secured and redeemable ones. Below are the few details about SREI Sep 2016 NCD Issue;
- Base Issue Size : Rs 2,500 Cr. (with an option to retain over-subscription up to Rs 7,500 Crores)
- Coupon Rate / Interest Rate :- Interest rates raging from 9.35% to 10% depending on the tenure and interest payment frequency.
- Type : Secured & Redeemable Non-Convertible Debentures.
- Rating: SREI Infra NCDs are rated ‘‘‘BWR AA+ (BWR Double A plus)’ by BRICKWORK. It implies high degree of safety regarding timely servicing of financial obligations with a very low credit risk.
- NRIs are not eligible to subscribe to this issue.
- IndiaBulls latest NCD public issue will be open for subscription from 15th September, 2016 to 23rd September, 2016. These NCDs are secured/un-secured and redeemable ones. Below are the few details about Indiabulls Housing Finance Sep 2016 NCD Issue;
- Base Issue Size : Rs 3,500 Cr. (with an option to retain over-subscription up to Rs 7,000 Crores)
- Coupon Rate / Interest Rate :- Interest rates raging from 8.55% to 9% on Secured NCDs & 8.65% to 9.15% (depending on the tenure, interest payment frequency & category of investor).
- Type : Secured & Un-secured Redeemable Non-Convertible Debentures.
- Rating: Indiabulls NCDs are rated ‘‘‘CARE AAA’ by CARE and BWR AAA by BWR indicating stable outlook.
- NRIs are not eligible to subscribe to this issue.
- Latest News (22-December-2016) : Reliance Home Finance Ltd’s latest NCD is open for subscription from 22nd December, 2016 to 6th January, 2017. These NCDs are secured/un-secured and redeemable ones. Below are the few details about Indiabulls Housing Finance Sep 2016 NCD Issue;
- Base Issue Size : Base Issue size is Rs 1,000 cr (with an Option to retain over-subscription amount up to Rs 3,000 Crores for Secured NCDs and upto Rs 500 Crores for Un-Secured NCDs aggregating upto Rs 3,500 Crores.)
- Coupon Rate / Interest Rate : The ROI ranges from 8.70% to 9.40% depending on the category of investor and tenure of the NCDs.
- Type : Secured & Un-secured Redeemable Non-Convertible Debentures.
- Rating: Rating of ‘CARE AA+’ by CARE and ‘BWR AA+’ Outlook: Stable by Brickwork for Secured NCDs and rating of ‘CARE AA’ by CARE and ‘BWR AA’ Outlook: Stable by Brickwork for Unsecured NCDs.
- NRIs are not eligible to subscribe to this issue.
- For detailed analysis, kindly read – ‘Reliance HFL NCD Pubic Issue – Should you invest?‘
- Latest News (28-December-2016) : SREI Equipment Finance Ltd’s latest NCD is open for subscription from 3rd January, 2017 to 20th January, 2017. These NCDs are secured/un-secured and redeemable ones. Below are the few details about SREI EFL Jan 2017 NCD Issue;
- Base Issue Size : Base Issue size is Rs 250 cr (with an Option to retain over-subscription amount up to Rs 500 Crores )
- Coupon Rate / Interest Rate :The ROI ranges from 8.6% to 9.75% depending on the category of investor and tenure of the NCDs.
- Type : Secured Non-Convertible Debentures.
- Rating: BWR AA+ Outlook Stable by Brickwork Ratings & SMERA AA/Stable’ by SMERA Ratings Ltd.
- For detailed analysis, kindly read – ‘SREI Equipment Finance NCD Public Issue – Jan 2017 – Should you invest?‘
- Latest News (11-Apr-2017) : Muthoot Finance’s latest NCD issue is now open from 11th April, 2017. For more details, kindly read my article @ ‘Muthoot Finance April 2017 NCD Issue – Review‘.
Besides the above public issues, TATA Steel is also looking to raise around Rs 10,000 via NCDs and also companies like HDFC, Air India, Capital First, PVR, TATA Motors, Manappuram, Sintex, Piramal Enterprises, UltraTech Cement etc., are also expected to raise capital through NCD public issues.
So, its clear that we are going to witness lot of action in Indian Debt market space especially w.r.t. NCDs in the coming months..
Let’s now understand – what are NCDs? What are the factors that need to be considered when identifying and short-listing the best NCDs? What are the Tax implications on interest income earned on NCDs? Are NCDs totally risk-free?
What is a Debenture?
Debenture is a type of Debt instrument which offers a fixed rate of interest for a specified tenure. Companies or governments use debentures to borrow money. Debentures are simply loans taken by the companies and do not provide the ownership in the company.
What are NCDs?
Debentures are of two types Convertible and Non-Convertible. The convertible debentures are the ones that can be converted into equity shares at a later time. This convertibility provides attraction to the investor but yield lower interest rates. Non convertible debentures does not convert into equity shares thus can yield a higher interest rate.
An NCD can be Secured or Unsecured. Secured NCDs are backed by the issuer company’s assets to fulfill the debt obligation unlike unsecured NCDs. (Video Courtesy : srei.com)
How to buy NCDs?
- Public Issue: During the public issue of the bonds, you can invest in them by submitting a physical form furnishing the details as requested. Also, you can make an investment online through your Demat Account.
- Secondary Market: NCDs bonds are listed on NSE or BSE or at times on both after the Public Issue. You can invest in these bonds through your trading account like the way you invest in shares.
Checklist to buy best NCD (Non Convertible Debentures)
How to select best NCD bonds? Below are the important factors that need to be considered before investing in a NCD public issue.
NCD Issuer-side factors :
- Credit Rating– Credit rating of an NCD is a third party assessment of the quality of bond in terms of its credit performance. Some of the leading credit rating agencies in India are CRISIL, ICRA, and Fitch. It is advisable to buy NCD which have good Credit Rating. These ratings can be AAA (good rating), AA+, AA & AA-. Lower the rating, higher would be the interest rate. Do keep in mind that Credit rating of the future NCD issues by the same company can be different provided if there is any change in the financial health of the company.
- Coupon Rate – The rate of interest offered by the issuer of NCD is called Coupon. Companies which carry higher risk give higher interest rate than others to lure investors for investment. There can be various options for interest payout such as monthly, quarterly, half yearly or annually. However, most NCDs offer annual and cumulative payout.
- Credibility of the Issuer / Promoter – Before investing in NCDs, it is advisable to look at company’s financial health and end of use funds. NCDs are not risk free. Their ability to pay interest is dependent upon the financial health of the issuer. Analyze the reason for raising the money from the markets. Check rating of companies which gives an idea of safety of your investment.
- Financial Health & Profitability – You can evaluate an NCD issue based on certain key indicators related to Company’s financial profile. Below are some; (You can find the information related to these in respective NCD Public Issue Prospectus)
- Non-Performing Assets : Check out if the NPA percentages have been increasing year on year. NPAs are nothing but Bad Loans. Most of the NCD issuers belong to the lending / financing industry. They raise capital through NCDs from the public and further lend money to the loan-seekers. So, high NPAs indicate that the company is unable to recover the loans.
- Interest Coverage Ratio : A declining interest coverage ratio is often something for investors to be wary of, as it indicates that a company may be unable to pay its debts in the future. This ratio is a very good assessment of a company’s short-term financial health.The following ranges can be of a general guide;
- Interest coverage ratio of 2:1 indicates a good interest cover position.
- Between 1.5 to 2:1 indicates average interest cover.
- Between 1.0 to 1.5:1 indicates some weakness that may require attention.
- Below 1 indicates that interest cover is insufficient to cover ongoing finance expenses.
Ratios should be considered over a period of time (say five years), in order to identify trends in the performance of the business. The calculation used to obtain this ratio is : Interest coverage ratio = earnings (before interest and tax)/interest expense.
- History of Past payments & Past NCD Issues – Check out if in the past the issuer has defaulted in making interest or principal repayments to their NCD subscribers.
- Additional Features – Some NCD public issues offer special rate of interest to Senior citizens or to shareholders. So, you may buy some shares and then invest in the NCD issue to get special interest rate. You have to provide your shareholding details in the application form. Also, Inflation linked NCDs are also being offered now. DHFL in its last NCD issue offered inflation linked coupon rate option. This was the first time a company has issued NCDs via inflation-based NCDs in India.
- Basis of Allotment – The NCDs are generally allotted on the basis of ‘First come, First serve’. Going by the huge demand for NCDs, you may have to subscribe to the issue(s) on the first day itself.
Investor-side factors:
- Tax Adjusted Returns : NCDs may offer better interest rates than other debt products like your bank fixed deposits. But, we need to calculate post tax returns on debentures, as the interest payouts on NCDs are taxable.
Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }
- Income Tax Slab rate : So, in the above formula, the post tax returns are dependent on ‘your income tax slab rate’. Higher the tax slab rate, lower the post tax returns. If you belong to low income-tax brackets, you can surely consider investing in highly rated (like AAA, AA, AA+ etc.,) and secured NCDs.
- Financial Goals : Not but not the least, you can invest in NCDs only if they fit in your overall financial plan requirements. If you are looking for fixed and regular income (or) for better interest rate than fixed deposits, and your post tax returns are good then you can consider investing in NCDs.
Debentures & Taxation
- TDS is not applicable on the listed debentures’ interest payouts (which are in Demat form). Else, TDS will be applicable if the interest exceeds the threshold limit of Rs.5,000/- in a financial year.
- Interest earned on NCD bonds is taxable as per the tax slab of the investor.
- If you sell NCDs on stock exchange before one year from the date of purchase, Short Term Capital Gains Tax is applicable. Tax rates depend on the tax slab you fall into.
- If you sell NCDs on stock exchange before maturity but after one year, Long Term Capital Gains Tax (if any) at 20% with indexation & 10% without indexation is applicable.
Should I invest in NCDs or Fixed Deposits issued by the same Company?
Sometimes you might have noticed a Company issuing both Corporate Fixed Deposits and also Non Convertible Debentures at the same point of time.
For example : Mahindra & Mahindra’s NCD issue was open for subscription in the month of May, 2016. They have also been accepting FDs from the public. Similarly DHFL issues both NCDs and also collects public deposits.
(Read : ‘How to find out if a Company is authorized to run a Fixed Deposit Scheme?‘)
So, given a choice, you may kindly prefer Secured NCDs to Corporate deposits. FDs are unsecured in nature and getting the FD issues rated by the credit rating agencies is not mandatory. Also, FDs are not listed on the stock exchanges whereas NCDs are generally listed either on BSE or NSE or both.
Are NCDs totally risk-free?
No, they are not risk-free. These carry higher risk than bank deposits. Higher return from NCDs come with higher risk. The main risk with NCDs is default risk. The issuer may not be able pay the interest payments.
You can prefer Secured NCDs to Unsecured NCDs. The difference is that in the case of secured NCDs, investors can get back some amount of the principal and interest if there is a default, since there is an underlying collateral (backed by company Assets). But in case of unsecured NCDs, there is no collateral.
NCDs are relatively safer assets than equity and mutual funds but they are riskier than bank FDs and Government bonds. NCD Issuers normally do not default but when things go drastically wrong, they may face problem in paying the investors. For example : Deccan chronicle or Shubi Agro’s case.
In addition, debentures of blue-chip companies (for example – HDFC) have less risk as these firms have robust finances. Small companies have more risk and so offer higher rate of interest. These companies carry higher risk and hence offer more interest rate than others to lure investors for investment.
Also, do note that NCDs have liquidity risk. Even if NCDs get listed on the stock exchanges, low volumes can deprive investors of any opportunity in exiting prematurely.
Kindly keep in mind all the above points when investing in NCDs. Also, do not invest your entire savings or investible surplus in one NCD issue alone.
Do you prefer NCDs to bank FDs? Have you invested in any of the past or latest NCD Public Issues? Kindly share your views. Cheers!
(Post published date : 23-August-2016) (Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net)
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Dear Mr. Sreekanth,
Thanks for your detailed article.
But, I still do not understand clearly difference between Secured & Unsecured NCDs. Is principal & interest not guaranteed from Unsecured
Unsecured NCDs though these are guaranteed from Secured NCDs?
Dear Rakesh,
A secured NCD is backed by the issuer company’s assets to fulfill the debt obligation whereas an unsecured NCD solely relies on the credit rating to ensure the company’s ability to service the debt.
“NCDs are debentures that are not convertible to equity shares. NCDs work like bonds which pay fixed interest and your investment is returned after specified years. Subordinated debt is debt which ranks after other debt, if a company falls into liquidation or bankruptcy. It is referred to as subordinate because the lenders have subordinate status in relationship to the normal debt. Unsecured NCDs are not backed by any assets; it means that, in case of a financial crunch, repaying investors may become an issue. Advisable to opt for secured NCDs with high ratings.”
Dear Sridharan
…I have purchased NCDs during Jan to May 2017 from open market NCDs..
They are due for payment..Maturity in Jan 2019.
I would like to know what is the Tax on this transaction ?
—————————
Further in Oct 2014 I had invested in 150 NCD .– for 3 year period.
The maturity is in Oct 2017.
But in 2017 I have added 48 units and the total is -150 plus 48=198 which is due on Oct-2017
How is the Tax calculated on 48 Units ?
Regards
Asif Adeni
Dear Asif,
Interest earned on NCD bonds is taxable as per the tax slab of the investor.
If you sell NCDs on stock exchange before one year from the date of purchase, Short Term Capital Gains Tax is applicable. Tax rates depend on the tax slab you fall into.
If you sell NCDs on stock exchange before maturity but after one year, Long Term Capital Gains Tax (if any) at 20% with indexation & 10% without indexation is applicable.
Sreekanth Reddy
First of all, kindly accept my apologies for misspelling your name in my previous mail.
1.I have never sold NCDs before maturity. In fact, I keep adding the quantity to the original allotted number of NCDs and wait for the company to remit the total amount at the time of maturity.
2.I also buy NCDs (other than the IPO-allotted by any company to me) from the open market and wait till the maturity date.
Is.LTCG or STCG applicable for ….1. or 2. scenarios mentioned here above ?
Regards
Asif Adeni
Dear Asif,
If you hold the NCDs till maturity date then only interest is chargeable to tax as per your income tax slab rate.
Hi Sreekanth,
I am new to this and would like to invest in NCDs. I would like to go for a discount broker for the trading and demat account but since they do not offer trading in NCDs, can I apply offline and hold those in the demat account provided by these brokers?
Dear Suraj,
I believe that Trading may not be allowed but you can hold the NCDs units in Demat account. You have to provide your Demat a/c details in NCD application form.
Dear Sreekanth, Thank you for your interesting articles and well-thought out responses to queries from readers like me. Can you please help me with your advice?
I am interested in NCDs that are already listed (since there are no new issues as of now). I find the quote of Edelweiss Housing as Rs 1,003.5 with a face value of Rs 1,000/-. This seems attractive.
But I need a monthly interest payout scheme. In this context, is it a good and sound investment proposition – the NCDs of Edelweiss mentioned above? Which ones would you recommend for me for a monthly payout scheme?
Instead of burning one’s fingers in the stock market gamble, is it wise to invest in such instruments? Btw, I am retired and my annual income from all sources will be Rs 2 lakhs. I have for investment about Rs 10 lakhs. Kindly advise. Thanks and regards, R. Chandrasekhar.
Dear Chandrasekhar,
If you are looking out for monthly interest payout, I guess there is only one option w.r.t Edelweiss July NCD issue.
Check out Series V (monthly payout & 120 months duration). These NCDs are secured but do understand the risks of investing in NCDs (in general)..
If you are highly dependent on the income generated by Rs 10 Lakh corpus, kindly do not invest the entire amount in one NCD issue.
You may consider mix of Sr Citizen Savings Scheme (if applicable), Post office MIS, Systematic Withdrawal option in Mutual Fund MIP etc.,
Read:
List of best investment options!
Thanks Sreekanth. I will study the options mentioned. However, I am not able to make out what would be the yield on Edelweiss Series V or conditions of the NCD, i.e. when is the next monthly payout etc. Can you enlighten me, please?
Dear Chandrasekhar ..I think effective yield is 10%.
Dear Sreekanth
Thanks for the information. And wish you and your family a very happy Deepavali. May God bless you all and please carry on the good work. Best wishes, R. Chandrasekhar.
Thank you for the wishes.
Happy Diwali!
Recenty I have taken Kosamattom Finance Limited NCD, Is this the safest one, I havent much information of NCD. But i have taken it because of attractive interest 11%. Please suggest me to continue or not.
Dear Jacob,
Even I do not have much knowledge about the said Company and its business operations.
There is no SAFEST NCD as such. There are certain risks associated with NCDs. But one can prefer buying Secured ones to unsecured.
Did you buy SECURED NCDs?
Hello,
I want to invest in NCD’s but the problem is i don’t know how to invest in such bonds , i just googled and found that i have to have a demat account but the AMC is 300-700 Rs per year if 1 lakh and pay 300*3=900 Rs for holding that NCD it doesn’t worth actually,
can you please guide small investor that invest occasionally
Dear Dev Babu..You can buy them offline too (physical application). You can find the details in respective ads of NCD Public Issues.
You can submit applications to respective Lead managers or Registrars who mange the issue.
For example : Bajaj capital for Indiabulls NCD issue.
Thanks
Hi Srikanth,
How can I invest in Masala bonds ? Are these good instruments ?
Regards
Dear Irshad..Masala bonds cane be a good choice (debt securities) for overseas investors (NRIs).
The rupee-denominated bonds or masala bonds are instruments through which Indian entities can raise funds by accessing overseas capital markets.
These bonds will be listed on foreign stock exchanges (For ex- London Stock exchange) and can not be traded on Indian stock exchanges.
Hi Sreekanth,
If I have a base EPF amount of 10L (example) & my basic is 50K. Is the below formula correct :
EPF calculation = Compounded Interest on 10L + Compounded Interest on 50K * 12months.
Regards
Hello,
Will you please make a article on demat and trading account also many of us want to invest in NCD’s and other mean of investment instrument but lacking knowledge of how to safely trade them stops us,
my query is i want to have demat account but not trading account
please give us some detail idea of various use of demat account and comparatively analysis of such account given by various company
Dear Amit..Will try to publish an article on this topic at the earliest.
Wanted to invest 20k in SREI NCDs which is secure and non-convertible. Is it good NCD. I can see they have not good rating.
Dear Rakesh..If you are in lower tax slab bracket, you may consider this NCD. (Return Vs Risk looks decent).
my expense per year is 9 lacs and corpus is 2.8 cr today .my age is 48. is it enough to retire? pl suggest investment in different asset classes % wise for me .
Dear preet,
Kindly go through these articles :
Retirement planning mad easy..!
List of investment options!
Hi Srikanth,
I wanted to have a short telecom with you. Kindly do let me know if this is possible ?
Regards
Dear Irshad ..I prefer discussing through blog comments or emails only, apologies.
Hi Srikanth,
My Basic is 70000 & I am contributing 100% into EPF. EPF interest = 8.8%
Assuming the above to be constant until retirement (for ease of calculation) : Can I use the below formula to arrive at the corpus amt :
= * POWER( (1 + 8.8%), no of years until retirement)
Dear Irshad ..May I know your current age and expected retirement age?
current age = 41
expected retirement age = 60
Dear Irshad,
Assuming the time period as 19 years (60-41), rate 8.8%, EPF (employer + employee yearly contributions) as around Rs 1,31,628 then the projected accumulation would be around Rs 59.3 Lakh.
Dear Srikant,
Thanks for the quick reply.
I used the below formula & got the corpus amt as 5Crores.
2016:: * POWER( (1 + 8.8%), 1)
2017:: 2016+ * POWER( (1 + 8.8%), 1)
2018:: 2017+ * POWER( (1 + 8.8%), 1)
–
–
–
2035(60yrs) – 2034+ * POWER( (1 + 8.8%), 1)
Hi Sreekanth, Your comments please
Regards
Dear Irshad ..You may try using the Excel PMT function. May I know what is the per year amount you are assuming?
Hi sreekanth
I have applied for DHFL earlier issue of NCD and got NCD in my demat. Can I apply now for this tranche II issue? Will it be giving me good returns? Is it suggestible?
Dear satyanarayana ..The returns are fixed and clear. You may invest in this Secured NCD issue if it meets your requirements. Given a choice, I will not invest in this issue and would prefer NCDs issued by other big companies, may be at a lower interest rate, that’s fine to me.
Hi, very informative article.
I am 28 years old and I am searching for good investment options. I just came to know about peer to peer lending as an emerging platform in India and wanted your views on that.
Dear Rajat ..Will soon try to publish an article on this.
Hello Sri, congratulations for great work on financial management. I would be grateful if you help me in planning my investment.
I earn around 65k a month, from which I can save around 35k to 40k. So please tell me what should ideal investment plan for me, if I agree to take moderate risk. Kindly reply.
Dear Sanket,
May I know your investment objectives / financial goals & time-frame??
Read:
How to create a SOLID Investment Plan?
List of articles on key aspects of Personal Financial Planning.
Hello Sri, thank u for reply. Let me elaborate my financial goals. I’m a doctor by profession, so can work even after 60 years of age. So retirement goal is ruled out. My age at present is 30 years. First important goal is to build a villa within 10 years. I already have a flat, which is worth 30 lakhs at present and this money can be used for building villa. Second important goal is education of my son who is just 2 years old now. Third is purchasing a luxurious car like BMW or Audi., within 10-15 years. I have already told you that I earn 65k a month and can save around 35k every month. I have HDFC click 2protect term insurance s.a. 50lakhs. This much is the information, kindly reply. Thank you.
Dear Sanket,
Kindly do not say ‘retirement goal’ can be ruled out. You got to plan for it, even if you are self-employed (professionally).
Kindly read this article and you may revert to me: Kid’s education goal planning & calculator.
You may consider buying a Family floater health insurance plan for family & Personal Accident insurance cover for self.
Read:
Best Family floater health insurance plans.
Best Personal Accident insurance plans.
Thank you for reply. But Dear Sri, I want your suggestions on how should I invest my savings considering 2 main purposes I.e. building a villa and purchasing a luxurious car, both within 10-15 years. Please refer my previous comments. Thank you.
Dear Sanket,
You may use the calculators available in the below articles and calculate how much savings required to achieve the goal amounts (Car & Property).
Article – 1.
Article – 2.
You may consider investing in Diversified Equity fund + Small Cap fund for the next 5 years or so, higher allocation to small cap fund.
Ex – ICICI Pru Value discovery fund & Franklin Smaller companies fund.
Read:
List of best investment options.
Best Equity funds.
Thank you for your reply sri. I have got my answers.
As per section 193 of the Income Tax Act, 1961, there is no tax deduction at source from any securities issued by a company in a dematerialized form and listed on a recognized stock exchange in India. It is correct?
Dear Sridharan,
Yes you are correct.
From 1-6-2008, any interest payable on any security issued by a company, where such security is in dematerialised form and is listed on a recognized stock exchange in India, there is no TDS on such interest income.
However, do note that no TDS does not necessarily mean no tax liability.
Kindly read : TDS & Misconceptions..