Non-Convertible Debentures (NCD) have been an attractive prospect for investors considering the high interest rate they offer. These help you diversify your investment portfolio by adding debt instruments that fetch regular income at a fixed interest rate and a fixed tenure.
However, in recent times the debt market has received negative spotlight with the downgrades by rating agencies and multiple defaults. This takes us to the question of whether you should be investing in the Tata Capital Tranche-II NCD which is scheduled to open on 13 August 2019.
What are NCDs?
Companies use non-convertible debentures to raise long-term capital for their business. In simple words, it is like a loan that the company borrows from the public which it will return with interest. These come with a fixed interest rate and tenure. It is like a fixed deposit with a bank in a way, but less secure.
Why is it called non-convertible?
Companies give the option to convert debentures issued into shares after a certain time to the owners of these debentures. NCDs do not come with this option. Further, these are divided as secured and unsecured NCDs. Secured NCDs are backed by the company's assets and unsecured ones are not. The unsecured ones are paid a higher interest rate because they hold higher risk.
Tata Capital NCD details
- Its is the Tranche-II of NCD Issue by Tata Capital Financial Services Limited. Tranche-I was issued in September 2018 with interest rate of 9.1 percent.
- Tranche-II will be open for subscription from 13 August to 23 August.
- It will open for subscription on all working days from 10:00 a.m. to 5:00 p.m
- These are both secured as well as unsecured NCDs of face value Rs 1,000 each.
- The company plans to raise Rs 299,790 lakh from secured NCDs and Rs 11,2810 lakh from unsecured NCDs.
- One will need to purchase a minimum of 10 NCDs (worth Rs 10,000) and in multiples of 1 thereafter.
- The NCDs will be listed on NSE as well as BSE, which make them liquid options.
- The issue includes 4 options that come with a fixed period of 3 years, 5 years, 8 years and 10 years and interest rates ranging from 8.35 percent to 8.85 percent.
|Frequency of Interest Payment||Annual||Annual||Annual||Annual|
|Minimum amount||Rs 10,000 (10 NCDs)||Rs 10,000 (10 NCDs)||Rs 10,000 (10 NCDs)||Rs 10,000 (10 NCDs)|
|In multiples of thereafter||Rs 1,000 (1 NCD)||Rs 1,000 (1 NCD)||Rs 1,000 (1 NCD)||Rs 1,000 (1 NCD)|
|Face Value of NCDs ( / NCD)||Rs 1,000||Rs 1,000||Rs 1,000||Rs 1,000|
|Issue Price||Rs 1,000||Rs 1,000||Rs 1,000||Rs 1,000|
|Coupon Rate for category I and II||8.35%||8.40%||8.55%||8.75%|
|Coupon Rate for category III and IV||8.45%||8.50%||8.85%||8.85%|
|Nature of indebtedness||Secured||Secured||Secured||Unsecured Subordinated|
The issue is allocated in the proportion of 35 percent to retail investors, 35 percent to HNIs, 35 percent to Qualified Institutional investors and 15 percent to corporates. The issue is not open to NRIs.
Should you invest?
Tata Capital's Tranche-II NCDs have been rated "AAA/Stable" by both Crisil and Care. The company has been earnings at a consistent and profitable rate in the last few years which makes them capable of paying the interest rates mentioned.
If you subscribe to secured NCDs, you will be given the same treatment as preferential shareholders; that is, you will be among the first to be repaid if the company shuts down for some reason. Again there is no guarantee of receiving the entire amount (it depends on how much the bankruptcy proceedings will raise after selling company assets) but you will be given a preference unlike ordinary shareholders.
Tata Capital forms part of the trusted Tata Group but the investment in NCDs do hold some risks as mentioned in detail in its prospectus. Being a Financial Services company, its major part (over 90%) of its earnings are subject to to fluctuations in interest rates which could cause its net interest income to vary.
Please read all the risk factors mentioned in their document before you make an investment and decide accordingly. Ideally, NCDs are safer when invested for a shorter period like 3 years as an extended period like 10 years can be subject to a much higher range of uncertainty.
How to apply?
You can apply through your broker you maintain a demat account with.