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.

Dewan Housing Finance Corporation Ltd NCD will be available for investment from 3 Aug.

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.Looking at the massive investor appetite for these NCDs, Dewan Housing and SREI Infra Finance have lined up their NCDs and are likely to raise Rs 1,000 crore in Aug.

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.
• 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 are/were available for investment in 2016.

Dewan  Housing Finance Corporation Ltd NCD 2016 Issue Highlights

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 NCDs

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 ]

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