The Reserve Bank of India (RBI) has recently released its third bi-monthly rate review of financial year 2019-20. The key announcement under the policy is the rate cut by 35 basis points(1 bps is 0.01%). This is the fourth consecutive rate cut from RBI , after a rate cut in February, April and June of calendar year 2019.
In view of the above, most of the banks and corporates may reduce the interest rates on their deposits schemes, Bonds, NCD Public Issues etc.,
This may induce 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. But, don’t forget this rule of thumb – “the higher the risk, the higher the potential return.”
Fixed income investors were spoilt for choice with four public issues of non-convertible debentures (NCDs) worth around Rs 25,000 crore were launched in the recent past to raise money to meet credit demand. The recent NCD Issues were offered by L&T Finance, Muthoot Finance, Indiabulls Consumer Finance, Manappuram Finance, India Infoline, TATA Capital, Indiabulls Commercial, Shriram Transport Finance etc.,
Shriram City Union Finance Ltd is proposing to offer latest NCD issue. SCUF is going to offer Secured redeemable NCDs. The proposed public issue of Shriram City Union Finance Bonds will be open for subscription from 21st August, 2019 to 19th September, 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’.
Shriram City Union Finance NCD August 2019 Public Issue – Key Features
Shriram City Union Finance is a part of the ‘Shriram Group’. It specializes in retail finance and has a PAN India presence.
Below are the few important details about upcoming Shriram City Union Finance NCD Aug-Sep 2019 (FY 2019-20) ;
- NCD Issue opening Date : 21st Aug, 2019
- Issue Closes on : 19th Sep, 2019
- Interest Rate or Coupon Rate on NCDs : The ROI ranges from 9.3% to 9.85% depending on the category of investor and tenure of the NCDs.
- Issue Size : Base Issue size is Rs 100 cr (With an option to retain over-subscription of Secured NCDs of up to Rs.900 crore).
- Mode of Issue : Demat
- Face Value or Issue Price of one NCD is Rs 1,000.
- Available Tenor options : 24 / 36 / 60 months
- Frequency of Interest payment : Annual / Monthly. Cumulative option is also available.
- 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 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. No security will be created for Unsecured NCDs.
- Credit Ratings : Credit Rating of “CARE AA+ Stable” for an amount of up to Rs. 3,000 Crore, by CARE Ratings Ltd. and “CRISIL AA (Stable)” for an amount of up to Rs. 3,000 Crore, by CRISIL.
- Issue Allocation Ratio : 40% of the Issue is for retail investors & 40% for HNIs (HNIs – individuals (applying for an amount of > Rs 10 lakh).
- PUT & Call options : No. 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 served’ basis.
- NRIs are not eligible to apply to this NCD issue.
Latest Shriram City Union Finance NCD Aug-Sep 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 Shriram City Union Finance’s August 2019 NCD Issue?
On one hand, we all are aware that interest rates on fixed income securities have already reached their lowest levels. With the recent rate cut announced by the RBI, we may witness further decline of bank deposit and Small Saving Schemes rates.
Hence, the interest rates offered on Secured NCDs look attractive when compared to other fixed income products like bank deposits or small saving schemes.
On the other hand, the NPA (Non-Performing Assets) related problems have been plaguing the banking and NBFC sector. The current cash/liquidity crunch (DHFL / IL&FS Saga) may also have a deeper impact on NBFCs businesses in the near future.
Also, note that the credit rating for this issue is not of the highest standard like the one given to recent NCD Issue of TATA Capital Aug NCD Issue.
Considering all these pointers and current economic scenario, given a choice, I will not put my money in this NCD issue.
Investors who are looking out for better returns than Bank FDs and who are ready to take some risk, can consider investing in 24 month NCD series of this issue.
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 }
Also, kindly understand the risks associated with NCDs and then take informed decision.
Continue reading :
- Best Company Fixed Deposits 2019-20 | Should you Invest?
- 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?
(Post first published on : 20-August-2019)
