Investors looking for higher returns from debt investments are flocking to NCDs (non-convertible debentures).This article looks at Non Convertible Debentures or NCD in 2016 available for investors. It gives overview of NCD, explains Terms associated with NCD like Coupon Rate and covers the NCD in 2016.

Indian companies have raised an aggregate Rs.2,700 crore through public issue of bonds in fiscal 2017 so far, data from the Securities and Exchange Board of India showed. Companies raised Rs.1.34 trillion through private placement of bonds to institutional investors.

• DHFL Tranche II NCD public issue was avialable from 29th of August-30 Aug 2016. DHFL raises Rs 10,000 crore in second NCD tranche in a month. The issue was oversubscribed with the portion reserved for high networth individuals (HNIs) and companies subscribed around 1.2 times and qualified institutional buyers (QIBs) subscribed around 2 times.
• Indiabulls Housing Finance The base issue size is Rs 3,500 crore. Indiabulls Housing Finance Ltdforeclosed its Rs 7,000 crore fund raising plan via NCDs in 1 day owing to an overwhelming response.  The issue got overwhelming response, with the NCD offering getting oversubscribed by 117 times on BSE within the first hour of bidding process. The issue received bids amounting Rs 4,100 crore against the base of Rs 3,500.
• Srei Infrastructure Finance Ltd (Srei)  will raise Rs 1,000 crore through a public offer of non-convertible debentures (NCDs).The NCDs will be issued in one or more tranches, the company said in a regulatory filing.  It will list the NCDs on both the exchanges NSE and BSE. Srei said the NCDs have been rated ‘BWR AA+’ by Brickwork Ratings India, which means the instruments carry a very low credit risk and have degree of safety with regard to timely servicing of financial obligations.

NCD issuances of DHFL, EdelweissBSE  and M&M Financial were subscribed on the first day itself, giving retail investors allotment of a far lower amount than what they applied for. For example, in the latest DHFL issue, retail investors will get allotment of only 65% of the amount they applied for, while in the Edelweiss Housing NCD issue they got allotment only for 50% of the amount applied for.

NCDs in 2016 are popular among investors

Investors looking for higher returns from debt investments are flocking to NCDs or non-convertible debentures. Close to double-digit returns from NCDs, is 2% more than that offered by bank fixed deposits, and hence the high demand. We are in a low interest environment where rates are heading lower, investors want to lock themselves into longer tenure NCDs

The public issue of Edelweiss Housing Finance was fully subscribed on the first day of the sale. In May, NCDs of Mahindra Finance, too, were subscribed on day one.

For DHFL The largest volume of subscription came from high net-worth individuals (HNIs) who put in more than Rs.9,000 crore, followed by an aggregate subscription of around Rs.5,000 crore from institutional investors, according to arrangers of the issue. The yield that the company has offered is far higher than what other AAA-rated issuers give. AAA-rated bonds are now giving 8-8.25% yield in the private placement market. In the secondary market, tax-free bonds are trading at around 6% yield.The yield offered by the company on the bonds for institutional investors ranged from 8.74% to 9.1%, while the yield for retail investors was between 8.33% and 9.3%.

DHFL, however, did not find many takers for CPI-linked bonds as the total subscription stood at a mere Rs.103 crore,

Overview of Investing in NCD

NCDs are fixed income debt instruments issued by a company wherein a company agrees to pay a fixed rate of interest on your investment for a specified period in order to raise money from market for business purposes. As the name suggests, these debentures cannot be converted into shares of issuing company unlike convertible debentures. Our article What are Non Convertible Debentures or NCD? explains NCD in detail and also compares NCD with Fixed Deposits and NCD with Tax Free Bonds.

• Interest on NCDs is paid at different time period like quarterly, semi-annually or annually. They also have an option of cumulative interest in which case interest is cumulated & paid on maturity
• 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.
• The NCD issues are rated by credit rating agencies like CRISIL, ICRA, FITCH, and CARE to ensure the company’s ability to service the debt on time & lower default risk.

Benefits of Investing in NCDs are

• Listing of NCDs on exchanges like NSE & BSE provides liquidity to your investments
• No tax Deducted at Source (TDS) on listed debentures
• Investment tenure ranging from 2 to as much as 20 years provides you with ample options to fulfill your financial goals
• Unlike FDs, NCDs have limited lock-in period which makes them attractive as far as liquidity is concerned
• Ratings by agencies like CARE, FITCH, CRISIL, ICRA enables you to assess the quality of debt papers before investment
• Option of holding bonds in ‘Demat Form’ makes your investments easy to handle & monitor

Tax Implications of NCD

• Held Till Maturity: Interest earned is added to the total income & taxed at marginal rate of income tax depending on the tax-slab you belong to. Interest income earned is taxable with these NCDs and the investors are required to pay tax on the interest income as per their respective tax slabs. TDS @ 10% will be deducted if these NCDs are held in physical/certificate form and annual interest income is more than Rs. 5,000. NCDs held in demat mode will not attract any TDS.
• Sold on exchange before one year: Short Term Capital Gains Tax at applicable rates depending on the tax slab you fall into
• Sold on exchange before maturity but after one year: Long Term Capital Gains Tax at 20% with indexation & 10% without indexation

Terms associated with NCD

The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures. A newly issued bond usually sells at the par value of Rs 1,000.

Coupon (The Interest Rate) : is the amount the holder will receive as interest payments. It’s called a coupon because in past there were physical coupons on the bond that you tear off and redeem for interest. The coupon is expressed as a percentage of the par value. If it pays a coupon of 10% and its face value is Rs 1,000, then it’ll pay Rs 100 of interest a year.

Maturity : The maturity date is the date in the future on which the investor’s principal will be repaid.

Issuer The issuer of a bond is a crucial factor to consider, as the issuer’s stability is main assurance of getting paid back.The rating system helps investors determine a company’s credit risk, it’s like report card for a company’s credit rating. Blue-chip firms, which are safer investments, have a high rating, while risky companies have a low rating. Ratings by agencies like CARE, FITCH, CRISIL, ICRA enables you to assess the quality of debt papers before investment

NCD in 2016

The following NCDs were available for investment in 2016.

Indiabulls Housing Finance Ltd  NCD in 2016

It offers interest payments on Cumulative, Monthly and Annual basis and has a coupon rates ranging from 9.08% to 10% and tenure of 400 days, 3 yrs and 5 yrs as per the choice of the investors. Allotment will be made on ‘first come – first served’ basis and is also available in demat as well as physical mode, however, trading will take place only in demat mode.

SREI Infrastructure Finance Ltd NCD in 2016

It offers interest payments on Cumulative, Monthly and Annual basis and has a coupon rates ranging from 9.08% to 10% and tenure of 400 days, 3 yrs and 5 yrs as per the choice of the investors. Allotment will be made on ‘first come – first served’ basis and is also available in demat as well as physical mode, however, trading will take place only in demat mode.

Dewan  Housing Finance Corporation Ltd NCD in 2016

Dewan Housing Finance Corporation Ltd (DHFL) is a deposit taking Housing Finance Company register with the NHB and focused on providing financial products for the Low and Middle income (LMI) segment in India in Tier II and Tier III cities and towns. DHFL have been active in the housing finance sector in India since 1984.

DHFL provides secured finance primarily to individuals, partnership firms and companies for the purpose, self-construction, improvement and extension of homes, new and resalable flats, commercial properties and land. It also provides certain categories of non-housing loans including loans for commercial property, medical equipment and for plant and machinery.

Investor Category and Allotment

• Category I : Institutional Investor – Public finance institutions, scheduled Commercial bank, venture capital, Insurance companies, provident & pension fund etc.
• Category II : Non-Institutional Investor – Statutory Bodies/Corporations,  Regional Rural Banks, Public/ Private / religious trusts which are authorised to invest in NCDs, Partnership Firms, LLPs & any other incorporated and/or unincorporated body of persons
• Category III : High Networth Individuals – Resident Indian Investor or HUF through the Karta applying for an amount aggregating above 10 lakh across all series of NCDs in Issue.
• Category IV : Retail Individuals Investors – Resident Indian Investor or HUF through the Karta applying for an amount aggregating up to and including 10 lakh across all series of NCDs in Issue

Allocation Ratio :

• Category I        – 20% of overall Issue Size
• Category II       – 20% of overall Issue Size
• Category III     – 30% of overall Issue Size  (HNI )
• Category IV    – 30% of overall Issue Size   (Retail)

CPI Linked Floating Rate NCD in 2016

DHFL is offering Series X NCDs which carries floating interest base on Reference CPI plus applicable spread to various Categories of Investors. While the spread will be fixed throughout the tenor of the Series X NCDs. The floor for floating interest rate has been fixed @ 8.90% p.a. for all categories of Investor & cap for floating interest @9.50% p.a.

Reference CPI : Inflation rate base on Consumer Price Index as released by Govt. of India is considered for Benchmark Index for the instrument [CPI (Rural + Urban) combined to be considered as mentioned in coupon structure ]