We have recently seen several companies are trying to catch the attention of investors by offering NCDs at high interest rate, these have been quite tempting for the risk-averse investors who can expect a good fixed rate of return. In this article we will read about what are NCDs, types of NCDs, reason for high inflow of NCDs offering lately, and risk associated.
What are NCDs?
NCDs or non-convertible debenture are a financial debt instrument that are used to raise long-term capital by the Company for specified tenure through public issue or private placement. This type of debt instrument cannot be converted into equity, hence they offer relatively higher returns than convertible debentures. They are a fixed income instrument just like bank fixed deposit with the interest payout on monthly/quarterly/annually/cumulative basis with the principal amount paid back to the debenture holder on the maturity. They are liquid as they can be traded on the trading platform as they are listed on either NSE or BSE.
Types of NCDs:
- Secured NCDs:
Secured NCDs are the type of debentures that are backed by any assets or any collateral of the company offering the NCDs. Investors of the NCDs are informed of the nature of the debentures at the time of their issue. If the company makes any default while the payment of redemption amount it can be recovered by liquidating the asset that is used to secure the NCD. The rate of interest offered on the secured debentures tends to be lower than that offered on unsecured debentures.
- Unsecured NCDs:
Unsecured NCDs are the type of debentures which are not backed by any asset or collateral by the company as a compensation to this, the interest rate offered by the company is higher for this kind of debenture than that offered on secured NCDs. If the company defaults in its payments the investors do not have any choice but to wait for such payments, this makes it a riskier for the investor to invest hence, it is advised to invest in NCDs issued by high credit-rated companies to safeguard the interest of an investor.
Reason for high inflow of NCDs lately:
In the current global scenarios, due to rising inflation the designated body like Reserve Bank of India (RBI) has been tightening money supply and raising the interest rates to control the rising inflation. For companies, to offer attractive NCDs may be the right thing to do when interest rates are rising, as they could benefit from a stable source of long-term funding without much hassle as caused by institutional lenders who constantly monitor and question them. After the rates fall they could benefit from swapping these loans. One of the main reasons companies are able to provide such high returns to the investor is that they don’t suffer from the constraint of priority sector lending which on the other side banks have to as these companies are usually engaged in lending for the purpose of equipment leasing, hire-purchase and investment, the returns earned by the companies on such lending are usually high and thus they manage to give their investors high returns which make the company as well as the investor to benefit from it. Below are some of the NCDs offered recently in the form of public issue:
| Company Name | Issue Open-close | Issue Size – Base (Rs Cr) | Issue Size – Shelf (Rs Cr) | Rating | Yield % Range |
| Navi Finserv Limited | May 23-June 02,2022 | 300 | 300 | IND A/ Stable by India Ratings & Research Pvt Ltd | 9.59%-9.8% |
| Muthoot Finance Limited | May 25-June 17,2022 | 75 | 225 | ICRA AA+/Stable | 7.25%-8% |
| Indel Money Limited | May 27-June 22, 2022 | 50 | 50 | Acuite BBB+/Stable by Acuite Ratings & Research Limited | 9.38%-11.57% |
| Edelweiss Broking Limited | Jul 05-Jul 12, 2022 | 150 | 150 | CRISIL AA-/Negative | 8.74%-9.95% |
| Kosamattam Finance Limited | Jul 13-Aug 04, 2022 | 175 | 175 | BWR BBB+/Positive by Brickwork Ratings India Private Limited. | 7.23%-9.92% |
| Muthoot Fincorp Limited | Aug 05-Sep 01, 2022 | 250 | 250 | CRISIL A+/Stable by CRISIL Ratings Limited | 8.29%-9.09% |
| Ugro Capital Limited | Sep 05-Sep 20, 2022 | 50 | 50 | ACUITE A+ by Acuite Ratings and Research Limited and CRISIL A- by CRISIL Ratings Limited | 10.52%-11.01% |
| Indiabulls Housing Finance Limited | Sep 05-Sep 22, 2022 | 100 | 900 | CRISIL AA/Stable and ICRA AA | 8.64%-9.54% |
| KLM Axiva Finvest Limited | Sep 15-Oct 12, 2022 | 100 | 100 | IND BBB-/Stable by India Ratings & Research Private Limited. | 9.11%-11.02% |
| Edelweiss Financial Services Ltd | Oct 03-Oct 17, 2022 | 200 | 200 | CRISIL AA-/ Negative and ACUITE AA-/Negative | 8.84%-10.09% |
| Muthoot Finance Limited | Oct 06-Oct 28, 2022 | 75 | 225 | ICRA AA+/Stable | 7.50%-8% |
| Indiabulls Housing Finance Limited | Oct 07-Oct 28, 2022 | 100 | 700 | CRISIL AA/Stable and ICRA AA | 9.04%-9.54% |
Risk associated:
Credit rating play a great role while studying a NCD offering, a less secure NCD with low credit rating tend to offer higher rate of interest than the one offering a safer credit rating. Retail investors must check that the higher yields are being offered by the companies that do not carry a high credit rating. On the other hand this discussion is only relevant if the economic conditions are stable but as per current scenarios where the economic conditions are not quite impressive if it worsens sharply, even the best companies would have losses on their hand. If the company is offering NCD at interest rates slightly higher than the fixed deposit return rates by the bank the post-tax returns from the NCDs may not be worth the risk. A slightly higher yield offered by the companies may turn out to be a cause of regret for the investors.
Conclusion:
As investors you should investigate about the features of the NCDs and the terms and conditions they operate on. You should always check the credit rating of the company as it tells a lot about the amount of risk associated with it, you should also understand whether they fulfil your goals of investment and also whether they are tax-friendly enough. It is advised that you should put only a small portion of your fixed income in such offerings. If you need any help regarding any query Elite Wealth is always at your service.