NCDs - Flavor of season

Team CrawFin/ Harshal Jawale, CFP^CM

Debt instruments have become the flavor of the season, Bank fixed deposits, company fixed deposits and now a flurry of non-convertible debenture issues all of these are offering handsome returns, given the high interest rate regime.

NCDs are issued by NBFC’s to raise money from public, it cannot be converted into stock and carries high interest rate. Within two months we had Shriram Transport Finance NCD, IIIFL NCD, Mannapuram Finance NCD, Mutdhoot Finance NCD and now Religare NCD is open for subscription. They carried interest rate of 12-12.5% per year with tenure upto 3-5 year.

NCDs can be Secured or Unsecured, most NCDs issued recently were secured meaning were covered by assets they own. In case of default such assets will be sold off to pay money to debenture holders. Please note debenture holders are preferred to make repayments over shareholders in case of bankruptcy of a company. Hence it is considered as safe instrument than equity.

NCDs are also listed on stock exchanges after the bond has been allotted to you. They trade like any other stock, and you can buy and sell them from the stock exchange at that time. You have to pay a premium or get a discount based on the market conditions at the time; this doesn’t affect how much interest you get paid annually. But trading in NCD is yet to pick up as purchasers are usually long term investors.

Interest income from NCDs is taxed similar to FDs at normal rates i.e. as per the tax slab of applicant by including it in “Income from other sources”.

If you sell NCD on stock exchange before maturity at premium/discount then capital gain/loss arises out of it and is subject to capital gains tax. While short term capital gains on sale of NCDs would be taxed at normal rates, long term capital gains on sale of NCD (a listed security) are taxed at the rate of 10% without indexation or 20% with indexation whichever is lower. Also note that there is no tax deduction at source (TDS) from any securities issued by a company in a dematerialized form and listed on a recognized stock exchange in India.

Ratings, Company financials, Track record of raising money are several other factors that must be kept in mind before investing into NCD. It is always advisable to wait for large corporate offer via any debt instrument (NCD/Bonds) in exchange of 1-2% forgone interest. SBI, IFCI, Tata Capital, L&T Finance, Tata Motor, M&M Finance, Godrej have raised money in last couple of years.  

If you have a surplus and are willing to take a little more risk for that additional one per cent return, you can consider investing into NCDs, but hold till maturity. Higher interest rate regime in India is likely to turn around in next few RBI meetings.

“Wealthy Investments need Healthy Methods”