Non Convertible debentures or NCDs
Conservative investors never give up a chance to earn 1% extra return on their investments in deposits and bonds. They are forever looking for that bank and company deposits, bonds, and debt mutual funds where they can earn that extra percent. The answer for such investors is Non Convertible debentures or NCDs.
What are NCDís
A private company is the sale of bonds or NCDs by companies looking to raise small amounts, typically less than Rs 300 crore, to a small set of investors. A clutch of distributors sells these bonds through word-of-mouth publicity, as regulations don't permit companies to advertise or market these bonds.
That means unless your agent or distributor is well connected, you won't know about the offer. Another hurdle is the minimum ticket size, which is higher than for normal bond offerings. One has to make a minimum investment of Rs 25,000 to Rs 1 lakh, compared with Rs 5,000 or Rs 10,000 in a regular public issue of bonds.
Evaluate company fundamentals
Currently, some finance companies like Muthoot, Mannapuram, SREI Infra Finance and HUDCO are offering bonds under the private placement route. The rates offered by them are indeed more.
Muthoot Finance is offering 12.75% for 18 months and 13% for 26 months. Similarly, Mannapuram Finance is offering 12.5% for 366 days, with an extra 0.5% for senior citizens.
SREI Infra Finance is offering 11.85% for a tenure of five years and three months, while HUDCO is offering a tax-free 8.09% for 10 years and 8.16% for 15 years. "Even though private placements are not advertised or marketed, a detailed prospectus is filed with Sebi and the issue is governed by Sebi guidelines.
Check the ratings and evaluate company fundamentals before committing your money to any such issue.
How Public issue are different from private NCD
The major difference between a public issue and a private placement is in their marketing and distribution. While a public issue can be advertised, you cannot do that for an issue offered through the private placement route.
Any kind of media communication, be it through print, television, internet or even mass mailers, cannot be used by the company or the distributor in a private placement.
Due to these restrictions, all brokers may not sell the issue. So, while in a public issue, an investor can just walk across to distributors and ask them for a form and fill it up, you need to check with your distributor if there is any NCD being offered through the private placement route.
As an investor, your investment approach to a public issue and an issue through private placement shouldn't be different. So, once you hear of any such investment opportunity, you need to do a check on the company issuing the NCD.
QUALITY OF ISSUE AND LIQUIDITY of NCD
Check the credentials and financials of the company and the industry it functions in before investing in its bonds. Ratings assigned by credit rating companies could also give you a fair idea about its financial strength and pedigree. If you are risk-averse, avoid companies with low ratings. Lower-rated companies may pay you a higher coupon than higher-rated companies, but may come with extra risk.
It is advisable for retail investors to only go for companies which have an AA+ rating and above, as the extra return is not worth the risk. The NCDs come with various tenures, ranging from one year to 15 years. Check the tenure of the NCD and see if you are ready to commit money for that long.
While the tenure of Mannapuram Finance's NCDs is only one year, that of SREI Infra is 63 months. Even though these NCDs would be listed, it is unlikely they would be liquid due to their low issue size and lack of trading on the exchange. So if you are committing your money to a long-duration NCD, be sure that you do not need the money for the next five years
CALCULATE POST-TAX RETURNS
It always makes sense to evaluate the post-tax returns of any product by taking into account the tax bracket you are in. If you are in the high-income bracket, take that into consideration. For example, the interest income earned on HUDCO bonds is tax free. So even though the interest is lower than the other issues, keep the tax-free aspect in mind.
HOW MUCH TO INVEST
Finally, a high coupon rate does not mean you go all out and invest all your money in the instrument. Many of these NCDs on offer are from non-banking finance companies, which carry higher risk compared to bank deposits.
Some of them will be listed, but due to the small base, it is unlikely that they will be liquid. In the event of you requiring funds in an emergency, it would be difficult to exit these products.
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