Product Review. Shriram Transport Fin NCD: Worth a ride?

Even as the rates offered by small-savings schemes and company deposits rise, firms are coming out with non-convertible debenture (NCD) offers with relatively higher payouts. NCDs are debentures that offer specific coupon rates for various tenures, and cannot be converted to equity shares. These instruments are listed and traded on BSE and NSE, though liquidity is generally not abundant.

The offer

Shriram Transport Finance Company (STFC), the largest commercial vehicles financier in the country, is offering NCDs for tenures of three, five and 10 years.

All three tenures have annual interest payout options, while the cumulative option is available for the three- and five-year tranches.

The rates for the cumulative options are attractive for the three- (9.4 per cent) and five-year (9.5 per cent) tenures and are at least 50-100 basis points more than what even the best non-banking companies offer on their FDs, and at least 150 basis points more than bank deposit rates for similar periods.

The annual interest payout option for 10 years carries the highest rate of 9.7 per cent.

The minimum investment amount is ₹10,000 (10 NCDs with a face value of ₹1,000 each). Senior citizens will get 0.35 per cent extra interest on these NCDs.

Should you invest?

Investors looking for higher interest rates can allocate a portion of their debt portfolio to such NCDs. Given that these instruments are riskier than bank FDs and small-savings schemes (PPF, SCSS, etc), investors must allocate not more than 10-15 per cent of their debt portfolio to NCDs. Bank and highly rated company FDs, low-duration debt funds, and small-savings schemes should form the core of your debt portfolio.

Given that there is a high possibility of the interest rates rising over the next year or so, it will be better not to lock into very long tenures. So, investors can skip the 10-year option and look at the three- and five-year tenures. Those seeking regular income can opt for monthly or annual interest payouts.

Taxability

Just as in the case of bank and company FDs, interest derived from NCDs is fully taxable at the slab rate of the investor. There is no TDS if the NCDs are held in the demat form, but you must declare the interest income and pay tax accordingly.

Thus, NCDs are especially attractive for those in the lower tax brackets — 5 and 20 per cent.

Even for those in the highest slab of 30 per cent, the post-tax yields are still attractive — nearly 6.53 per cent for those opting for the five-year option and 6.47 for three years.

The capital gains on NCDs held for more than a year and sold in the exchanges are taxed at 10 per cent without indexation. Short-term capital gains are taxable at the slab rate of the investor.

Risk factors

NCDs are certainly riskier than bank FDs, given that there is no threshold level of insurance as in the case of bank deposits. There have been instances of some companies defaulting on their NCD interest payouts.

However, the NCDs offered by STFC are secured as the issue is backed by the company’s assets. CRISIL and India Ratings have both given AA+ rating for the issue, indicating a high level of safety.

STFC’s financial parameters are fairly healthy. The company has assets of ₹1.01 lakh crore as of June 2018, a growth of over 18 per cent compared with the same period in the previous fiscal.

Net NPA (non-performing assets) is not alarming and is at a reasonable 2.74 per cent as of June 2018. Overall capital adequacy is healthy at 17.06 per cent.

The offer is open from October 15 to 29. The offer is for ₹300 crore, with an option to retain a subscription of up to ₹1,350 crore.

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