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 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 on day one of the subscription period itself.
Latest NCD issue by Reliance Home Finance (Dec 2016) has seen over-subscription of 3 times the issue size on day one itself.
Many companies like Mahindra & Mahindra Fin Services, Edelweiss, Dewan Housing Finance, India Bulls Housing Finance etc., have raised funds by issuing NCDs in FY 2016-17.
Adding to the list is SREI Equipment Finance Ltd. SREI EFL is now proposing to issue secured & redeemable NCDs. The proposed public issue will be open for subscription from 3rd January, 2017 to 20th January, 2017. (SREI Equipment Finance Ltd is a wholly owned subsidiary of SREI Infra Ltd)
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.
SREI EFL’s latest NCD issue offers non-convertible debentures in the form of Secured NCDs. Below is a short video on ‘basics of NCDs’.
SREI Equipment Finance Jan 2017 NCD : Issue Details & Features
SREI EFL is a non-banking finance company with a principal focus on financing Infrastructure equipment. It provides financial products & services to companies operating in the construction, mining, ports, railways, healthcare, oil & gas etc., sectors.
Below are the few important details about SREI EFL’s Jan 2017 NCD Issue;
- NCD Issue opening Date : 3rd January, 2017
- Issue Closes on : 20th January, 2017.
- Interest Rate or Coupon Rate on NCDs : The ROI ranges from 8.6% to 9.75% 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 500 Crores )
- Mode of Issue : Physical & Demat forms, subject to certain conditions.
- Face Value or Issue Price of one NCD is Rs 1,000.
- Available Tenor options : 400 days, 3 years & 5 Years.
- Frequency of Interest payment : Monthly, Annual & Cumulative (on maturity date of NCDs).
- 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 : BWR AA+ – Outlook Stable by Brickwork Ratings & SMERA AA/Stable’ by SMERA Ratings Ltd.
- Issue Allocation Ratio : 50% of the issue is for retail & HNI individual investors (HNIs – individuals (applying for an amount of > Rs 10 lakh).
- There are no PUT & Call options for these Secured NCDs. (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.
Rate of Interest on SREI Equipment Finance Jan 2017 NCDs
Should you invest in SREI EFL Jan 2017 NCDs?
We all are aware that interest rates on fixed income securities are moving downwards. Considering the downtrend, if you are looking for regular interest income (I think Cumulative option is not available in this issue) and are in 10% or 20% income tax slab rate, you may consider investing in these Secured NCDs. If you require regular income, can subscribe to monthly or annual interest payment mode. If you do not require regular income, you may subscribe to cumulative option.
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.
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.
Have you invested in any of the recent Public Issues of NCDs? Do you prefer NCDs to Bank FDs? Kindly share your views and comments.
(Featured Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net) (Post published on 19-December-2016) (Video Courtesy : srei.com)
opting cumulative 5 year attract income tax or it’s TEE (income tax ,exempt ,exempt) type ?
Dear Amit..Whatever is the time-frame, the interest income on NCD is taxable. Also, the investment amount does not qualify for any tax deduction. So, falls under TTE category.
Kindly read:
Tax treatment of various Financial investments.Different Asset classes have different Tax implications – How Returns are taxed?
Hi Sreekant
I am an active investor in NCD and especially SREI but im afriad as this time the company is bringing out NCD issues almost in a quarter. Isnt this a cause of concern ?
Companies bring out NCD once in a year or ages like L&T, Shriram etc. is SREI facing a cash crunch that within 3 months they are issuing a new NCD
Dear arjun,
Your opion can or can not be true.
It depends on market timing (may be this is the right time to launch many NCD issues at slightly lower rates), their business plan, use of funds strategy etc.,
But, as I always suggest, not to pick only one company NCD, rather invest in couple of good NCD issues (of diff companies) based on your investment plan/objectives.
Hi Sreekanth, I have already taken NCD of SERI Infrastructure finance for Rs.95000. Is it advisable to invest again in same company though it is venture cmpany? Does Secured NCD means that in worst case scenario our intrest amount will not be given to us or also our principle amount will pose risk.
Dear Manvendra,
If it meets your requirement, you may invest in this issue too.
But yes in worst case scenario, you may not bet both interest as well as principal, but the risk of it happening can be low.
Thankyou sir,
Looking at the interest rate around 7% given by bank FDs, it seems investing in this issue is more beneficial. Sir is it advisable to divide my investment in this issue in 2-3 options like some money for 390 days (cumulative), some for 3 years(annually payment) and some for 5 years(annually payment). For 3&5 years I think interest payment annually is more safer than cumulative option.
Dear Manvendra ..It all depends on your requirements.
This is a Secured NCD public issue, so can be considered, but do understand the risks associated with NCDs and then proceed 🙂
Hi Sreekanth,
Can you let me know if NRIs can purchase these NCDs.
Dear Anuj,
Kindly note that Non-resident Indians (NRI’s) cannot invest in these NCD’s.
Hello Sir, I read the Draft Prospectus which says that Previous NCD Holders, Equity Shareholders, etc. will get some extra Coupon rate of interest. So I wantd some details on the same. If I purchase the shares now, will I be eligible for Extra coupon?
Got it sir, firstly it is not a listed company so I will not be able to purchase the shares. Is there any other way out??
Sir, Thanks for your detailed analysis. Of late, I am one of your vivid readers and I find your analysis most helpful which facilitates me to take a decision without any ordeals.
Thank you dear Subbu for following my blog posts, keep visiting 🙂
Thanks for the info Shreekanth,
Which one do you like more, Reliance NCD or SREI NCD?
Dear Ramesh,
Both Issues have been given same Credit Ratings. But if we have to pick one, may be Reliance NCD. But kindly ignore unsecured NCD option w.r.t Reliance issue.
The issue closes today.
Thank you for the detailed information on SREI Equipment Finance Jan 2017..This article was very helpful..