L&T Finance NCD April 2019 Public Issue : Details & Review

The interest rates on Bank fixed deposits may have touched the lowest levels (showing signs of an up-tick now) and the interest rates on popular small savings schemes are not very attractive either. Also, Tax Free Bond Issues are not available now. This is inducing many small investors to look out for better fixed income products which can give decent fixed rate of return.

NCDs or Non Convertible Debentures are one of the fixed income options that can satiate investors’ hunger for better yield.

Fixed income investors were spoilt for choice with four public issues of non-convertible debentures (NCDs) worth more than Rs 20,000 crore were launched during last 120 days to raise money to meet credit demand. The recent NCD Issues were offered by Muthoot Finance, Indiabulls Consumer Finance, Manappuram Finance, India Infoline, TATA Capital, Indiabulls Commercial, Shriram Transport Finance etc.,.

L&T Finance Ltd is proposing to offer latest NCD issue. L&T Finance is going to offer Secured redeemable NCDs. The proposed public issue of L&T Finance Bonds will be open for subscription from 8th April, 2019 to 18th April, 2019.

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. Below is a short video on ‘basics of NCDs’.

L&T Finance NCD April 2019 Public Issue – Key Features

L&T Finance Limited (L&TFL) is part of the larger L&T Group which is one of the leading business conglomerates in India. It is one of the leading private non-banking financial services companies in India in terms of total loans outstanding, as of December 31, 2018. Its primary financing business segments are rural, wholesale and housing.

• L&TFL’s rural business comprises farm equipment finance, two-wheeler finance and micro loans.
• Its wholesale business comprises of infrastructure finance, supply chain finance and structured corporate finance.
• L&TFL’s housing business comprises of loans against property and real estate finance.

L&TFL’s average AUM for the period ended March 31 2016, 2017 and 2018 and December 31, 2018 was Rs. 4,327.23 crores, Rs. 17,198.24 crores, Rs. 34,195.03 crores and Rs. 41,902.24 crores respectively. The Company’s profit for the period ended March 31 2016, 2017 and 2018 and December 31, 2018 were Rs. 87.40 crores, Rs. 16.04 crores, Rs. 289.92 crores and Rs. 687.20 Cr respectively. The Company’s net NPA for March 31, 2016, 2017 and 2018 were 3.36%, 3.99% and 2.81%.

Below are the few important details about upcoming L&T Finance NCD April 2019 (FY 2019-20) ;

• NCD Issue opening Date : 8th Apr, 2019
• Issue Closes on : 18th Apr, 2019.
• Interest Rate or Coupon Rate on NCDs : The ROI ranges from 8.66% to 9.05% depending on the category of investor and tenure of the NCDs.
• Issue Size : Base Issue size is Rs 500 cr (with an option to retain over-subscription amount of up to Rs 1,000 cr for Tranche-II Issue.)
• Mode of Issue : Demat only
• Face Value or Issue Price of one NCD is Rs 1,000.
• Available Tenor options : 36 / 60 / 96 months
• Frequency of Interest payment : Monthly & Annual. Cumulative option is available for 36 month & 60 month NCD Series.
• Minimum Application size : Rs 10,000 (10 NCDs) and in multiple of Rs 1,000 thereafter.
• Listing : The NCDs are proposed to be listed on NSE & BSE stock exchanges.
• Security & Asset Cover : The Company and Promoter will create and maintain appropriate security in favour of the Debenture Trustee for the NCD Holders on the assets adequate to ensure required asset cover for the Secured NCDs.
• Credit Ratings : Credit Rating of “CARE AAA Stable” for an amount of up to Rs. 5,000 Crore, by CARE Ratings Ltd., “ICRA AAA (Stable)” for an amount of up to Rs. 5,000 Crore, by ICRA Limited and “ IND AAA / Stable” for an amount of up to Rs. 5,000 Crore, by India Ratings.
• Issue Allocation Ratio : 45% of the Issue is for retail investors & 35% for HNIs (HNIs – individuals (applying for an amount of > Rs 10 lakh).
• PUT & Call options : Put & Call options are not available. (What are Put & Call options? – NCDs can have Put or Call options. If a company issues a ‘Callable Debenture’, it means that it can be redeemed by the Issuer (company) before the bond’s maturity. A debenture with a ‘Put option’ works in exactly the opposite manner, wherein the investor can sell the bond to the issuer at a specified price before its maturity.)
• Allotment of NCDs is on ‘first come, first serve’ basis.
• NRIs are not eligible to apply to this NCD issue.

Latest L&T Finance NCD April 2019 Issue – Coupon Rates

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 10% without indexation is applicable.
  • Listed Debentures : Holding period 1+ year to qualify as LTCG. LTCG tax rate @ of 10% without indexation & STCG tax rate is as per ‘income tax slab rate’.
  • Unlisted Debentures: Holding period of 3 year to qualify as LTCG. STCG is taxed @ as per income tax slab rate. LTCG of 20% without indexation.

Should you invest in L&T Finance NCD April 2019 Issue?

As we all are aware that interest rates on fixed income securities have reached their lowest levels. The bank interest rates are showing some signs of up-trend, hence it is advisable to avoid investing in medium to long-term NCDs now. Also, the NPA (Non-Performing Assets) related problems have been plaguing the banking sector (NBFCs as well). The current cash/liquidity crunch (DHFL/IL&FS Saga) may also have a deeper impact on NBFCs businesses in the near future.

Given the highest credit ratings of this L&T Fin NCD Issue, if you could afford to take some risk, are looking for regular interest income and are in 10% or 20% income tax slab rate, you may consider investing in 36 month NCD Series. Kindly note that the interest rates offered in this April issue are slightly lower than the rates offered in L&T March issue (If you are in the highest tax slab, you may also consider investing in Tax Free Bonds from Secondary Market.)

Kindly understand the risks associated with NCDs and then take informed decision.

Before investing in NCDs, kindly calculate your post tax returns on debentures and take your decision, as the interest payouts are taxable.

Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }

Are NCDs totally risk-free? – No, they are not risk-free. These carry higher risk than bank deposits. The main risk with NCDs is default risk. The issuer may not be able pay the interest payments.

NCDs are relatively safer assets than Stocks 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.

The main risk with NCDs is default risk. The issuer may not be able to pay the interest payments. NCD Issuers, especially the top business groups, normally do not default but when things go drastically wrong, they may face problem in paying the investors. In such a scenario, secured NCD holders (if any) would be given higher priority than the holders of Subordinated NCDs. But, do not invest your entire investible surplus in one Company’s NCD Issue.

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.

You may consider other alternative fixed income avenues like Debt oriented Mutual Funds, Hybrid Mutual Funds, Tax Free Bonds, Post office MIS scheme, PPF, Post office Senior Citizen Savings Scheme, 7.75% GoI Bonds etc.,

Have you invested in any of the recent Public Issues of NCDs (Muthoot Finance NCD Feb 2019 / Indiabulls Consumer Fin NCD Feb 2019 / India Infoline Jan 2019 NCD Issue / Mahindra Finance (Jan 2019 Issue) / TATA Capital )? Do you prefer NCDs to Bank FDs? Do you believe that upcoming NCDs may offer even better interest rates? Kindly share your views. Cheers!

Continue reading :

• What are NCDs? How to buy best NCD? Tax Implications on NCDs
• Snapshot of the most Popular Investment options in India, all in one place!
• Best Lump sum Investment options for Retirees/Senior Citizens to get Regular Income?
• How to check if a Company can collect Deposits from the Public? (Company FD Schemes)

(Post first published on : 02-April-2019) (This article is based on limited available information, if required, the content will be edited.)