9.50% Shriram Transport Finance NCDs June 2018 – Should you invest?

9.50% Shriram Transport Finance NCDs June 2018 issue is open for subscription from 27th June 2018 to 20th July 2018. Shriram Transport Finance is going to offer Secured and redeemable NCDs. Is it worth to invest?

In such falling or low-interest rates on FDs, NCDs like 9.50% Shriram Transport Finance NCDs June 2018 may be a breather to many investors. Because they offer secured constant fixed stream of income for investors.

WHAT IS A DEBENTURE?

It is a debt instrument which offers a fixed rate of interest for the fixed tenure like your Bank FDs. Usually, Companies or Governments use the tool of debentures to borrow or raise the money for their business expansion.

It is nothing but you are lending a loan to the company. In return, the company will give you an interest rate fixed for a fixed tenure.

WHAT ARE NCDS (NON-CONVERTIBLE DEBENTURES)?

There are two types of debentures. One is CONVERTIBLE and another is NON-CONVERTIBLE. The convertible debentures are the ones that can be converted into equity shares at a later time. This convertibility provides an attraction to the investor but yields lower interest rates. Non-convertible debentures does not convert into equity shares thus can yield a higher interest rate.

Convertible NCDs turning to shares means you will be the part of the owner of that company.

NCDs or Non-Convertible Debentures are again two types. Once is SECURED and another is UNSECURED. Secured NCDs are backed by the issuer company’s assets to fulfill the debt obligation in case of bankruptcy of the company.

However, UNSECURED NCDs are not backed by any assets and in case company goes bankrupt, there can be an issue in paying back the bondholders. Only after the payment is made to every entity which has some security, the unsecured NCD bondholders have any chance of getting back their money. Hence, these NCD’s have high-interest rates.

Taxation of NCDs (Non-Converitable Debentures)

Before proceeding further to blindly invest, check the tax treatment of such NCDs.

The taxability of interest on NCD will depend on the method of accounting you follow for recognizing your income.

If you are following the cash method of accounting, interest will be taxable as and when the interest is received (like in this case of NCDs).

However, under the mercantile method of accounting, interest income on NCD will be taxable as and when interest is accrued and due.

If you hold the listed NCD, (cumulative or annual interest payment), for a period of one year or more, and on selling such NCD if you earn the gain, then such gain will be long-term capital gains (LTCG) chargeable to tax at 10% without indexation benefit.

If you hold the listed NCD for less than one year and on selling of the said NCD and earn the profit then such gain will be short-term capital gains (LTCG) chargeable to tax at normal rates.

Hence, you have to consider the interest income taxation and also capital gain taxation (if you sell it before maturity).

Features of 9.50% Shriram Transport Finance NCDs June 2018

Shriram Transport Finance is an NBFC (Non-Banking Finance Company). This is also the part of the Shriram group of companies. Many of you know that Shriram Group of Companies has a has a strong presence in financial services in India, especially in commercial vehicle financing, consumer finance, life and general insurance, stock broking, chit funds and distribution of financial products, such as life and general insurance products and mutual fund products.

Shriram Transport Finance is the one of the largest asset financing NBFC in the organized sector in India that cater to first time users and small road transport operators for financing pre-owned commercial vehicles.

Let us see the important details and features of upcoming 9.50% Shriram Transport Finance NCDs June 2018 issue.

  • NCD Issue Opening Date: 27th June 2018
  • Issue Closes on: 20th July 2018.
  • Interest Rate or Coupon Rate on NCDs: The ROI ranges from 8.93% to 9.50% depending on the category of investor and tenure of the NCDs.
  • Issue Size: Base Issue size is Rs 1,000 Cr. (with an Option to retain over-subscription amount up to Rs 4,000 Crores. Total Issue size Rs 5,000 Cr).
  • Mode of Issue: Demat (subject to certain terms & conditions).
  • Face Value or Issue Price of one NCD is Rs.1,000.
  • Available Tenor options : 3 years to 10 years
  • The frequency of Interest payment: Annual / Monthly. A cumulative option is also available on 3 and 5-year NCDs.
  • Minimum Application size: Rs 10,000 (10 NCDs) and in multiples of Rs.1,000 thereafter.
  • Listing: The NCDs are proposed to be listed on BSE & NSE stock exchanges.
  • Security & Asset Cover: The Company and Promoter will create and maintain appropriate security in favor of the Debenture Trustee for the NCD Holders on the assets adequate to ensure required asset cover for the Secured NCDs.
  • Credit Ratings: ‘CRISIL AA+/Stable’ by CRISIL for an amount of upto Rs. 5,000 Crores and ‘IND AA+: Outlook
    Stable’ by India Ratings and Research for an amount up to Rs. 5,000 Crores.
  • Issue Allocation Ratio: 40% of the Issue is for retail investors & 40% for HNIs (HNIs – individuals (applying for an amount of > Rs 10 lakh).
  • PUT & Call options: No Put & Call options are available. (What are Put & Call options? – NCDs can have Put or Call options. If a company issues a ‘Callable Debenture’, it means that it can be redeemed by the Issuer (company) before the bond’s maturity. A debenture with a ‘Put option’ works in exactly the opposite manner, wherein the investor can sell the bond to the issuer at a specified price before its maturity.)
  • Allotment of NCDs is on ‘first come, first served’ basis.
  • NRIs are not eligible to apply to this NCD issue.
  • The initial allottees of the proposed Tranche-I Issue who are Senior Citizens on the Deemed Date of Allotment shall be eligible for a total additional incentive of 0.35% p.a.

The rate of Interest on 9.50% Shriram Transport Finance NCDs June 2018

I will explain the interest rate offered by 9.50% Shriram Transport Finance NCDs June 2018 for various options as below.

Interest rate of 9.50% Shriram Transport Finance NCDs June 2018

You notice that the effective rate for 10 years tenure is 9.5%. This I feel the best option for those who are looking for a constant stream of income.

9.50% Shriram Transport Finance NCDs June 2018 – Should you invest?

# INTEREST RATE

If you consider the current Bank FD rates of some other debt fixed interest rates, then you notice that they are at a low end. Hence, if you are looking for some fixed return of interest on your capital, then definitely the best choice.

# SECURITY AND CREDIT RATING

These NCDs are secured and hence you no need to worry even if the company goes bankrupt or in financial trouble. However, never rely on current rating. Because current credit rating may change in future based company’s financial condition.

# INTEREST RATE PAYMENT

This NCD not offers a cumulative type of payment. Hence, you must not treat this like Bank FDs. They pay you the interest either annual or monthly. Hence, if you are looking for some constant stream of income, then go ahead for this NCD. At maturity, you will just receive what you invested.

# TAXATION OF NCDS

Do remember that you have to pay the tax on whatever the interest you receive from such NCDs. Hence, always consider the returns based on post-tax returns rather than EYE catching pre-tax returns.

The formula to calculate the same is as below.

Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }

Hence, before proceeding further, you have to look for your NEED, RISKS and TAXATION.

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