A slew of non-convertible debentures (NCDs) has been lined up over the coming weeks. India Infoline Finance Ltd’s (IIFL’s) NCD issue will open on September 5. Shriram City Transport is set to announce its issue anytime and so are Religare Finvest and Srei Infrastructure Finance.
Companies have been hurrying with their issues because many expect the Reserve Bank of India (RBI) to cut rates in the upcoming policy. This will render these issues less attractive for individuals. The pull for most of these companies has been the success of Shriram Transport Finance’s recent issue.
As for IIFL’s NCDs, the rate of interest on offer is very attractive (effective yield of 12.75 per cent). Typically, NCDs offer one-two per cent over company and bank deposits. However, that should not be all as this issue has been rated AA negative and is an unsecured one. Some experts are not comfortable with the fact that the IIFL’s 90 per cent revenues comes from equity brokerage and it invests in the real estate sector aggressively. In comparison, they feel Muthoot Finance and Shriram Group companies, being asset-backed, are better option.
Certified financial planner D Sundararajan begs to differ. He says safety is not always important, assurance of the company also matters. IIFL is a known company, has been around for so many years and so he feels the NCDs can be subscribed to.
“You need to look beyond safety. Many times debenture holders get stuck in even secured issues as the company does not pay in tough times (Lloyd Finance). IIFL is giving monthly interest payment option as well,” he says.
NCDs are of two types – secured and unsecured. Secured debentures are marked to assets owned by the issuing company through a trust, which is supposed to look into the debenture holders’ interest. The trust can sell the earmarked assets to pay the debenture holders in case the company defaults. In the case of bankruptcy, secured debenture holders are paid first. Whatever is left is used to pay unsecured holders as these debentures have no assets marked to them. That’s why secured debt is safer than the unsecured ones.
Sundararajan feels NCDs, though not the best instrument to invest, are a good option in the present scheme of things, for the debt component of your portfolio. “These instruments are giving very good assured returns of 12-13 per cent. And investors don’t need to get locked in for very long, five-six years on the higher side,” he explains.
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However, Abhinav Angirish of InvestOnline.in cautions to not invest all the surplus you have. “Either diversify among the NCDs or put 50 per cent into NCDs and the remaining in fixed deposits,” he says. He adds that investors should not get carried away with the rate of interest being offered by these debentures but also pay heed to the credit rating being allotted.
| SECURED INVESTMENTS | |||
| Instruments | Returns (%) | Liquidity | Taxation |
| NCDs (IIFL) | 12.75 (6 years) | Low | Added to income and taxed |
| Company deposits (M&M) | 9.75 (3 years) | Low | Added to income and taxed |
| Fixed deposits (SBI)* | 9 (3-5 years) | High | Added to income and taxed |
| Debt mutual fund | 7.50-8 (5 years) | High | 20 per cent with indexation and 10 per cent without it |
| Source: Bluechip India, Value Research, SBI website, IIFL press release *Investment in fixed deposits of 5 years and more are exempt from tax under Section 80c | |||
Vivek Rege of VR Wealth Advisors is strictly against individuals investing in NCDs because individuals do not understand the product. For instance, most get carried away with the rate of interest being offered, when credit rating is a more important point to note. Secondly, credit rating for companies changes every six-eight months depending on the books of accounts. But, neither do individuals know about it nor would they be able track it and understand it. “If ratings of a company is revised downwards, the investor cannot sell the bonds easily on the stock exchange as they will not get the desired rate for it and probably not even a buyer,” he says. Experts say typically debentures offer three-four per cent lower rate once listed.
The interest income on debentures is added to your income and taxed as per slab. Therefore, experts advise these to those who are either in lower tax bracket (of 10 per cent) or earn less than the basic exemption limit of Rs 2 lakh.