Predicting interest rate movements can be highly speculative. For a fixed-income investor, a rising interest rate scenario is preferable as banks and other institutions raise starts offering higher rates. Of late several companies have raised funds by offering high rates on their NCD issues. NCD (non-convertible debenture) is a debt investment similar to a bond, with a fixed tenure and a fixed interest rate.
The latest in the row is Indiabulls Consumer Finance’s public issue of secured, redeemable and non-convertible debentures which will be open for subscription from February 4th to March 4th, 2019.
Also Read: What is your post-Budget 2019 income tax outgo? Calculate now
The minimum investment under any option is Rs 10,000. The entire issue has been segregated into four different categories based on the profile of the investor. While category I and II caters to institutions and trusts, Category III is for HNI individuals investing Rs 10 lakh or more across various tenures and Category IV is for retail individuals investing below Rs 10 lakh. The interest rate, however, is similar to all categories of investors.
Tenure and rates
Choose the tenure that suits you based on risk profile and regular income needs.
There are 3 annual interest options of 26 months,38 months and 60 months, providing interest rate of 10.75 percent, 10.90 percent and 11 percent respectively.
There are 2 monthly interest options of 38 months and 60 months providing interest rate of 10.40 percent and 10.5 percent respectively.
There are 3 cumulative interest options of 26 months,38 months and 60 months providing interest rate (effective yield) of 10.75 percent, 10.90 percent and 11 percent respectively.
No put and call options
Importantly, there are no put and call options in this NCD issue. In a falling interest rate scenario, a non-existent call option (where the issuer can redeem early) is beneficial to the investor, while in a rising interest rate environment, the put option gives the investor an edge.
Liquidity
The allotment in the issue to all investors will be in electronic form i.e. in dematerialised form and in multiples of one NCD. Thereafter, they will be listed on the stock exchanges and will be traded there. As per the Debt Regulations, the trading of the NCDs on the Stock Exchange shall be in dematerialized form only in multiples of one NCD.
All NCD’s get listed in stock exchanges but the liquidity over there could be low, thus impacting the selling price. Therefore, choose the duration and invest in them after properly estimating your long term liquidity needs.
Ratings
The issue is rated CARE AA and BWR AA+ by Brickwork Ratings. Ratings of the NCD issue reflect the strength of the issuer in servicing its financial obligations i.e. to pay interest as and when they become due and pay the maturity proceeds on time. However, such rating may change over time and hence blindly investing on the basis of ratings is not the right approach.
Secured NCDs
In addition to the ratings, some NCD options within the same issue may be secured in nature. In case of secured NCD, the claims of the Secured NCD Holders shall be superior to the claims of any unsecured creditors as the former would constitute secured obligations of the company. The unsecured NCDs are subordinated and are not secured by any charge on the assets of the company and will be subordinate to the claims of all other creditors. Therefore, secured NCDs may carry a little lower rate than the unsecured NCD within the same issue.
As per this issues prospectus, “The NCDs would constitute secured and senior obligations of our Company and shall be first ranking pari passu with the existing secured creditors on all loans and advances/ book debts/ receivables, both present and future of our Company equal to the value one time of the debentures outstanding plus interest accrued thereon, and subject to any obligations under applicable statutory and/or regulatory requirements.”
Tax benefits
There are no tax benefits in investing in NCD’s. The interest earned ( monthly, annually) gets added to investor’s total income and is liable to be taxed as per the income slab. The only silver lining is that if you hold the debentures in demat form, there will not be any deduction of TDS, else, if the annual interest exceeds Rs 5,000 in any financial year, there will be incidence of TDS. One may, however, avoid it, if eligible by may submitting form 15 G/H to avoid deduction of TDS
Budget 2019 has proposed to enhance the TDS limit on interest earned from bank and post office deposits from Rs 10,000 to Rs 40,000. This move is expected to attract higher deposits by the banks. investors may also consider higher yields, through this or other such NCDs, when it comes to parking funds for investment purpose.
What to do
The interest rate offered by them is comparatively higher than bank deposits or for that matter any other fixed-income investment including small savings schemes. One may consider taking advantage of the interest rate opportunities and yet be watchful of the risks involved.
Irrespective of the rating and the lucrative long term rate, an investor may stick to medium-term by taking some exposure in the 26,38 month duration. Further, diversify across more than one NCD and across tenures to manage credit risk and reinvestment risk, respectively.
