It’s raining NCDs ! Should you invest in the Latest NCD Public Issues (2016-17)?

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)