Individual investors with moderate-to-higher threat appetite can look at investing in non-convertible debentures (NCD). Two non-banking monetary companies—Piramal Capital and Housing Finance (PCHFL) and IIFL Home Finance — have come out with their NCD problems. PCHFL is providing interest prices of 8.35-9% based on the tenure (26-120 months), when IIFL Home Finance is providing a coupon price of 9.6% for month-to-month interest payout and 10% for annual payout for a fixed tenure of 87 months.Fixed deposits prices supplied by banks are 5.5-6% for 1-5 years tenure.
However, investors have to be cautious when investing in an NCD and look at the credit rating of the enterprise. PCHFL’s problem has been rated as AA by CARE Ratings and AA (outlook: Negative) by ICRA, when IIFL Home Finance’s instrument is rated AA with a steady outlook by Crisil Ratings and AA+ with a adverse outlook by Brickwork Ratings.
NCDs have larger dangers
Cash-strapped providers typically resort to NCDs with larger interest prices to raise income from the public. Secured NCDs are backed by assets, exactly where if the enterprise is unable to fulfil its obligations, the assets are liquidated to repay the investors. Companies providing secured debentures spend decrease coupons than non-secured ones. In unsecured NCDs, if the enterprise defaults or faces liquidation, investors will just shed the income invested.
As NCDs are not liquid, it is not simple to sell the bonds even in the secondary marketplace as trading remains incredibly thin. Investors have to retain a tab on the ratings as extended as they remain invested. For instance, IL&FS was downgraded to D rating, from the highest AAA in significantly less than two months. Typically, these with AAA ratings have the highest degree of security, these beneath AA should really be avoided.
PCHFL’s NCDs
PCHFL, a wholly-owned subsidiary of Piramal Enterprise, is providing secured NCDs with problem size of Rs 200 crore with an solution to retain oversubscription of up to Rs 800 crore. The problem presents 4 tenures – 26, 36, 60 and 120 months with the coupon ranging involving 8.35 to 9% (see chart). The face worth of each and every NCD is Rs 1,000 and the minimum quantity of investment is Rs 10,000 (10 NCDs). There are two interest payment alternatives – annual and cumulative – in the 26-month tenure.
The enterprise has reserved up to 40% of the problem for retail investors to be allotted on ‘first come, first served’ basis. The offer you for the 1st tranche will close on July 23, 2021.
IIFL Home Finance’s NCDs
The IIFL Home Loan Bonds are unsecured subordinate redeemable NCDs providing fixed price of 10% per annum for an annual interest payout solution and 9.6% for month-to-month interest payout solution. The tenure is fixed for 87 months. The face worth is Rs 1,000 per NCD and the minimum application quantity is Rs 10,000 (10 NCDs). The problem size is for `1,000 crore (base problem of Rs one hundred crore with an solution to retain more than subscription up to Rs 900 crore). Subscription for the Trance 1 problem will close on July 28, 2021.
Taxation of NCDs
There will be no tax deduction at supply as the holdings will be in demat type. Interest earned on NCDs are taxed at the marginal price. Also, if they are sold inside a year, quick-term capital gains at marginal price will be applicable. If sold soon after a year, extended-term capital gains at 10% with no indexation plus education and larger education cess of 4% will be applicable.
What should really investors do?
Investors have to keep in mind NCDs carry a larger credit and liquidity threat than bank deposits. Experts recommend going for secured NCDs to decrease the threat considerably in case of a full default. Also, allocation should really not be more than 10% of one’s fixed revenue portfolio.