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 three public issues of non-convertible debentures (NCDs) worth Rs 18,500 crore were launched during last 30-45 days to raise money to meet credit demand. The recent NCD Issues were offered by TATA Capital, Aadhar Housing & Indiabulls Commercial.
Shriram Transport Finance Co Ltd is proposing to offer latest NCD issue. Shriram Transport Finance is going to offer Secured and redeemable NCDs. The proposed public issue will be open for subscription from 15th October, 2018 to 29th October, 2018.
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 Transport Finance NCD Oct 2018 Public Issue – Key Features
Shriram Transport Finance Company Limited (STFC) was established in 1979 and has a long track record of over three decades in the commercial vehicle financing industry in India. The Company has been registered as a deposit-taking NBFC with the Reserve Bank of India (RBI) since 4 September 2000.
STFC is a part of the Shriram group of companies, which has a strong presence in financial services in India, including commercial vehicle financing, consumer finance, life and general insurance, stock broking, chit funds and distribution of financial products, such as life and general insurance products and mutual fund products.
The Assets Under Management has grown from Rs 79,489.59 crores as of March 31, 2017 on a standalone basis to Rs 95,306.02 crores (comprising assets under financing activities of Rs 80514.15 crores and loan assets securitised and assigned of Rs 1,4791.87 crores) as of March 31, 2018 on a standalone basis. The Net NPAs as a percentage of Net Loan Assets was 2.83% and 2.66% as of March 31, 2018, and March 31, 2017 respectively.
Below are the few important details about upcoming Shriram Transport Finance Oct 2018 NCD issue (FY 2018-19) ;
- NCD Issue opening Date : 15th Oct, 2018
- Issue Closes on : 29th Oct, 2018.
- Interest Rate or Coupon Rate on NCDs : The ROI ranges from 9.40% to 9.70% depending on the category of investor and tenure of the NCDs.
- Issue Size : Base Issue size is Rs 300 cr (with an option to retain oversubscription amount of up to Rs 1,350 cr for Tranche-II)
- Mode of Issue : Demat
- Face Value or Issue Price of one NCD is Rs 1,000.
- Available Tenor options : 3 years / 5 years / 10 years
- Frequency of Interest payment : Monthly & Annual. Cumulative option is available for 3 year & 5 year tenure 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 BSE & NSE 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 : ‘CRISIL AA+/Stable’ by CRISIL for an amount of up to Rs. 5,000 Crores and ‘IND AA+: Outlook Stable’ by India Ratings and Research for an amount up to Rs. 5,000 Crores..
- 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 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.
- The initial allottees who are Senior Citizens on the Deemed Date of Allotment shall be eligible for an additional incentive of 0.25% p.a. provided the NCDs issued under the proposed Tranche are continued to be held by such individual investors on the relevant Record Date for the relevant Interest Payment date.
- You may download the ‘draft Shelf Prospectus’ from this link..
Rate of Interest on latest NCD Issue by Shriram Transport Finance
Under the three year tenure NCD series (cumulative option), if you invest Rs 1,000 then Rs 1,309 is payable on the maturity date. The maturity amount will be Rs 1,318 in case of Senior Citizens.
Under the five year tenure NCD series (cumulative option), if you invest Rs 1,000 then Rs 1,574 is payable on the maturity date. The maturity amount will be Rs 1,592 in case of Senior Citizens.
Should you invest in Shriram Transport Finance NCD Issue (Oct 2018)?
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). Considering this scenario, if you are looking for regular interest income and are in 10% or 20% income tax slab rate, you may consider investing in up to three year (cumulative/non-cumulative) Secured NCDs.
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.
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, 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 (TATA Capital / Indiabulls Commercial )? 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
- List of Best Investment Options
- 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)
(Featured Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net) (Post first published on : 09-Oct-2018) (This article is based on limited available information, if required, the content will be edited.)
Hi Srikanth,
Are NCDs transactable before maturity?
For e.g. If I apply now for a 3 year option and after 1 year need the money, can i sell this online through my demat a/c?
In such cases what might be the factors influencing the market price of the NCD? Will the market value be higher or lower than the Face Value of Rs.1000
Thanks
Rohit
You can sell it on any day once you get it into Demat, only point to note is that the rate may vary and you cannot get a rate you expect. It may be 50+or- rupees lesser or even more.
Thanks for the response Balaji, will the market rate be dependent on the RBI interest rates e.g if the rates go up in future, this NCD will loose value and vice-versa
Yes, correct. FD rates increase would trigger lesser ncd price in the market.
Thanks for the update, happy investing!
The blog which you are posting is really very good and very well explained . It is said that Don’t save what is left after spending but spend what is left after savings. Thanks for giving us this informative blog.
Dear Sreekanth
I understand that there is incentive of 0.25% pa for SC if NCD are held for full tenure.
If yes, kindly confirm and also let us know how will it be managed, i.e., paid every year with interest. In case someone sells it say after 1 year how will it be recovered etc.
Thanks
Dear Mahesh,
Yes, there is an additional incentive of 0.25% for Senior citizen investors. It wont be recovered.
“The initial allottees under Category III and Category IV in the proposed Tranche II Issue who are Senior Citizens on the Deemed Date of Allotment shall be eligible for an additional incentive of 0.25% p.a. provided the NCDs issued under the proposed Tranche 2 Issue are continued to be held by such investors under Category III and Category IV on the relevant Record Date for the relevant Interest Payment date for Series I, Series II, Series III, Series IV and/or Series V. “
Your reviews are sufficient and contains almost all information, yet if you can provide a link to download prospectus, it would be a great feature.
In future, as standard information, you may also incorporate when interest will be paid for various options, i.e., anniversary or some other date.
Regards.
Dear Mahesh,
Thank you for the suggestions, will try to implement these in my future posts. Keep visiting ReLakhs!
I have now provided the link to download the draft prospectus in the above article.