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 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.
Almost all the recent and latest NCD Public Issues have been fully subscribed from all category of investors within 1 – 3 days of the subscription period itself.
The most recent NCD issue by Muthoot Finance (April 2017) has been fully subscribed within couple of days from the date of issue opening in April, 2017.
Many companies like Edelweiss, Dewan Housing Finance, India Bulls Housing Finance, SREI Infra etc., have raised funds by issuing NCDs in FY 2016-17.
Mahindra & Mahindra Financial Services (MMFSL) is now proposing to offer latest NCD issue . M&M Financial Services is going to offer un-secured, subordinated, redeemable NCDs. The proposed public issue will be open for subscription from 10th July, 2017 to 28th July, 2017.
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.
M&M Financial Services latest NCD issue (July 2017) offers non-convertible debentures in the form of Un-Secured NCDs only.
Mahindra & Mahindra Financial Services NCD July 2017 Public Issue Details
M&M Financial Services is one of the leading Non-Banking Finance Companies (NBFCs) in India. It is part of the Mahindra group, which is one of the largest business conglomerates in India. Below are the important details on this upcoming NCD Issue (in FY 2017-18) ;
- NCD Issue opening Date : 10th July, 2017
- Issue Closes on : 28th July, 2017.
- Interest Rate or Coupon Rate on NCDs : The ROI ranges from 7.75% to 8.05% depending on the category of investor and tenure of the NCDs.
- Issue Size : Base Issue size is Rs 250 cr (with an Option to retain over-subscription amount up to Rs 1,750 Crores, aggregating up to Rs 2,000 crores.)
- Mode of Issue : Demat form only
- Face Value or Issue Price of one NCD is Rs 1,000.
- Available Tenor options : 7 / 10 / 15 years.
- Frequency of Interest payment : Annual.
- 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 BSE stock exchange.
- Security & Asset Cover : The Company and Promoter will not create or maintain appropriate security in favour of the Debenture Trustee for the NCD Holders, as this issue is for un-secured NCDs.
- Credit Ratings : ‘IND AAA – Outlook Stable’ from India Ratings & ‘BWR AAA – Outlook Stable’ by Brickwork Ratings.
- Issue Allocation Ratio : 70% of the issue is for retail & HNI individual investors (HNIs – individuals (applying for an amount of > Rs 10 lakh).
- PUT & Call options : No Put option is available. Call Option is available for 15 year tenure NCDs (callable by the company after 10 years). (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 served’ basis.
- NRIs are not eligible to apply to this NCD issue.
M&M Financial Services – Latest NCD Issue – Options & Rate of Interest
Should you invest in Mahindra Finance’s latest NCD Issue?
I believe that you may ignore subscribing to this issue. If you observe, the interest rates offered in the last few NCD issues (by Muthoot Fin Apr’17 / Reliance HFL / SREI EFL) were better than the ROI offered by this issue. Also, these are un-secured and subordinated NCDs. Investing in subordinated NCDs for long-term (like 7 to 15 years) may not be advisable.
What are unsecured subordinated NCDs? – Unsecured subordinated debt securities (here, NCDs) are the ones which rank after other debts if a company falls into liquidation or bankruptcy. So, in the event of any liquidation, unsecured NCDs are prioritized lower than other classes of debt for honoring the claims.
Kindly note that NCDs are not totally risk-free. These carry higher risk than bank deposits. 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.
Have you invested in any of the recent Public Issues of NCDs? Do you prefer NCDs to Bank FDs? Kindly share your views. Cheers!
(Post published on : 5-July-2017) (This article is based on limited available information, if required, the content will be edited.)