Wednesday, December 21, 2016

Reliance Home Finance NCD issue, opens on Dec22, to invest or not?

#Reliance Home Finance, a fully owned subsidiary of #Reliance capital is set to make its maiden offer of secured and unsecured debentures on Dec 22, 2016.  

Year 2016 has seen an huge upsurge in Debenture issues by corporates, which were lapped up by investors. Following demonetisation spree and government’s endeavour to bringing down interest rate, corporate bonds appear to be a lcurative option . While lower interest rate should mean a positive move for the over all economy in the long run, the fixed income category is expected to see low return.

My take - 
The company has been growing consistently over last 5 years and has ability to pay the interest on the loan. However, the business is particularly interest rate sensitive and dependent on the growth of housing sector. 
NCD offers higher return, it comes with a higher risk. The secured NCD didn’t recieve the highest credit rating. Unsecured NCD, by nature is not backed by any security or assey making it a high risk investment. Conservative investor should avoid the unsecured NCD completely.
The retail investor can however look at some exposure in secured NCD category.

What is NCD and what makes it so attractive 
NCD is a fixed income instrument. Apart from taking bank loans, Corporates and NBFCs raise money through issuing debentures. It is a financial instrument issued by corporates to support their business needs. There are two type of debentures, convertible debentures and non-convertible debenture. Convertible debentures are unsecured bonds and can be converted into equities or stocks at a future date as specified by the issuer.

NCD is financial instrument used for taking loan from the financial market. It cannot be converted into equity shares of the issuer in a future date, hence it offers higher interest rate. The NCD offers atleast 1.5 – 2% higher interest than any fixed deposit by a reputed bank and company deposits. NCDs come in both secured and unsecure form, secured #NCDs are backed by assets. Unsecured NCDs entails higher risk. 

Added Edge
1. What makes it more attractive is, in the falling interest regime, the bond prices may surge, hence the value of the funds. 
2. No TDS deducted on the demat form of investment (physical form does) 

Points for the new investors
1. Once you come to know about a new NCD offer, check with your stock broker for online application.
2. Like any other IPO, it has a NCD comes with opening and closing dates
3. NCD offers coupon rate. Coupon rate is the interest rate paid on a bond by its issuer for the term of the security. For example, if a NCD issue comes with a face value of Rs. 100 and coupon rate 10%, the interest earned will be Rs. 10 per annum. However, in the tenure if the NAV price falls or surge, it will have no impact on the interest pay out, it will continue as Rs. 10 per year throughout the tenure. Hence, coupon rate is fixed on the offer price and continue through maturity  
4. Check for the credit rating allotted by #ICRA, #CRISIL, #CARE (triple A rating Suggest good financial health of the issuer, double A may give higher coupon rate, triple A ensures safety of your capital) 
5. NCDs are also traded on stock exchanges. Apart from the new offers, investors can also buy exiting NCDs through stock exchanges, however, one need to be double careful and seek guidance from financial planner.   
6. Interests are generally paid through direct credit, RTGS, ECS and NEFT mode. It may offer monthly/ quarterly/ annually/ cumulative options. 
7. Tax – The investment is taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor.
8. This is as liquid as a bank fixed deposit. However, there is no penalty fee for pre-mature withdrawal of this investment
9. Additional Features – Some NCD public issues offer special rate of interest to Senior citizens or to shareholder.

1. It’s #liquidity is as good as any fixed deposit in bank, which has a specific tenure but can be withdrawn any time. However, FD may charge a penalty fee on interest accrued.. but incase of NCD, there is no penalty. 
2. If it is compared with company fixed deposit, company deposits (a popular instrument in the senior citizen segment with 0.25- 0.50% extra interest)comes with various conditions for pre-mature withdrawal, for eg – lock-in periods, penalties etc. 
3. NCDs come with Rating from #ICRA #CRISIL #IndiaRatings #CARE which gives a clarity to the investor on the risk involved, higher the rating, lower is the risk (AAA being the highest category, followed by AA, A, A-, BBB and so on)
4. Incase of bankruptcy, NCD holders get preference over shareholders

1. Incase interest rate increase, the value of the NCD may fall, sometimes even below the Face Value. 
2. The low credit score of instrument indocates lower epayment of interest and the actual amount capacity of the borrower.
2. Though, the instrument can be traded on the exchanges, one may not find a buyer for NCDs if the trade volumes on bourses are low. 
#reliance not #mymoneystreets

Please share if you like