Shriram City Union Finance NCD: Should you subscribe?

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Shriram City Union Finance NCD: Should you subscribe?
Shriram City Union Finance Ltd. (SCUFL), part of the Shriram Group of Companies, is in the market to raise capital through the issue of secured non-convertible debentures (NCD). The issue will open for public subscription on April 16, 2014 and close on May 16, 2014. Through the issue the company aims to mop up Rs. 100 crore with an option to retain over-subscription to the maximum of Rs. 200 crore.

The issue can be subscribed to by resident individuals, HUFs, companies and body corporates, national investment funds, partnership firms, banks, mutual funds, public financial institutions, venture capital, commercial banks, co-operative banks, insurance companies, private or public charitable trusts and other eligible categories.

Of the total issue size, SCUFL has allocated 40% NCDs to retail investors, 40% to HNIs and 20% to non-institutional and institutional investors.

Should you subscribe?

The minimum application size of the issue is Rs. 10,000 for 10 NCDs with each NCD carrying a face value of Rs. 1,000. The NCD issue is available with both annual interest and cumulative options.

To retail investors, the NCD issue will offer a coupon rate of 11.00%, 11.50%, 11.75% p.a. for 2 years, 3 years and 5 years respectively. While to the non- investor class, the NCD issue will offer 10.50%, 10.75%, 10.85% for 2 years, 3 years and 5 years maturity respectively. The post-tax return for an investor falling in the 10% income tax bracket will be 9.87%,10.32%, 10.54% for NCDs with maturity of 2, 3 and 5 years respectively.And for those falling in the higher tax bracket of 30%, the effective yield will be 7.60%, 7.95% and 8.12%. Hence, the issue seems to be a good bet for those falling in the lower income tax bracket as then the yield accruing to the investor is way higher.

So, the rate of return offered by SCUFL NCD is fairly higher than the interest rate of around 9-9.5 per cent offered by banks. Nonetheless, when it comes to safety of investment one would prefer a bank, rather than a non banking finance company.

The NCD issue has been assigned AA rating which signifies that such instruments carry very low credit risk and high degree of safety with regard to timely servicing of principal and interest payments.

So, the offered coupon rate of 11.75% per annum is certainly attractive and as the issue is proposed to be listed on the Bombay Stock Exchange, investors who wish to redeem their investment at an earlier date i.e. before the maturity term, can do so by selling the NCDs at the stock exchange. But it has to be remembered that often liquidity in such debt instruments is very low and investors shall not be able to sell all of their holdings at one go.

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