Mahindra and Mahindra Financial Services have opened subscription for its first tranche of NCDs today. The issue closes on January 25. Here's a complete breakdown on the NCD issue and whether or not you should invest in it:
NCDs or non-convertible debentures are issued by companies to raise funds and they bear fixed return as coupon rate which is paid out to their investors. Such instruments pay regular return either monthly, quarterly or annually.
Details of the NCD Issue:
Through its first tranche of NCDs, the NBFC company aims to raise a total of Rs. 3500 crores. Though the initial issue size of the NCD offer stands at Rs. 500 crore, the company can retain an over-subscription to the maximum of Rs. 3000 crore. The face value of the debenture is Rs. 1000. The bonds to be issued only in demat form can be subscribed for a minimum of Rs. 10000 i.e. 10 NCDs (10 NCDs x Rs 1,000).
These NCD bonds would be listed on BSE. Hence, these are liquid investments.
Non-resident Indians (NRI's) cannot invest in these NCD's.
Mahindra Finance has four tenures; Series I with 39-months tenure, Series II with 60-months tenure, Series III with 96-months option (eight years) and Series IV with 120-month (10 years) option. All these options will pay interest annually.
Credit Rating: The first tranche of NCD issue by M&M Financial Services carry a credit rating of AAA by rating agency Care. Care rates those instruments as AAA which it considers to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.
Annual coupon rate on M&M NCDs
|Interest payment frequency||Annual||Annual||Annual||Annual|
|Tenure||39 months||60 months||96 months||120 months|
|Coupon rate for retail investors||9.05%||9.15%||9.30%||9.50%|
|Effective yield per annum||9.07%||9.17%||9.31%||9.50%|
|Nature of indebtedness||Secured||Secured||Secured||Unsecured|
For investor category I (QIB) and category II (corporate), series I, series II, series III and series IV will provide coupon rate of 9%, 9.10%, 9.20% and 9.35% per annum, respectively, payable annually.
Notably the return on these NCDs is higher than bank fixed deposits of similar tenures. SBI on its term deposits of similar tenure offers interest rate of 7.03%. So, by and large these NCDs offer 2% points more in respect of the yield to investors.
Conclusion: If you are willing to earn higher fixed return than bank fixed deposits and can afford to take that extra risk even after the recent IL&FS fiasco, you can consider investment in NCD issue of the company for 39 months and 60 months maximum. And should completely avoid unsecured NCDs and NCDs of longer tenure as both the interest rate regime as well as performance of the company cannot be determined with accuracy for a longer tenure.