BackNCDs of IIFL, JM Financial up for sale. Should you invest?
IIFL and JM Financial offer NCDs with maximum yields of 10.50% and 10.40%, respectivelyA debt mutual fund will offer a less risky diversified basket of bonds and non-convertible debentures
PremiumTwo non-convertible debenture (NCD) issues opened for subscription on Tuesday. While the NCD offered by India Infoline Finance Ltd (IIFL), a non-banking finance company (NBFC), will close on 30 August, the issue by JM Financial Products, the NBFC arm of JM Financial Group, will remain open till 4 September 2019. The IIFL NCD is offering an yield as high as 10.50% and the JM Financial NCD is giving a maximum yield of 10.40%.
But with the debt market still under a cloud in view of recent defaults and downgrades of various securities, does it make sense to invest in these NCDs? Before we answer that question, let’s look at the issue details of both NCDs.
The offers
IIFL NCD: The minimum application amount is ₹10,000 for retail investors. IIFL is looking to raise a minimum of ₹100 crore with the option to retain another ₹900 crore in case of oversubscription.
The NCD is being offered in six series. Series I, III and VI will pay out interest at the end of tenures of 15 months, 39 months and 69 months at cumulative interest rates of 10%, 9.85% and 10.5%, respectively. Series II comes with a tenure of 39 months and will pay quarterly interest of 9.5%. Series IV has a tenor of 39 months and will pay annual interest of 9.85%. Series V has a tenor of 69 months and will pay monthly interest of 10%. Series I to IV are secured, whereas Series V and VI are unsecured in nature.
It has been rated AA (stable) by CRISIL and ICRA, and AA+ (stable) by Brickwork Ratings.
JM Financial NCD: the company plans to raise a base issue size of ₹100 crore with the option of retaining another ₹400 crore in case of oversubscription. The minimum application amount is ₹10,000 for tenors of 38 months, 60 months and 84 months. The NCD is available in Series I to V. Series I and II have an interest or coupon rate of 10.20% and a tenor of 38 months each; Series I will give annual interest, while Series II will give cumulative. Series III has a tenor of 60 months and annual coupon rate of 10.30%. Series IV also has a tenor of 60 months but gives a monthly coupon rate of 9.85%.
The company can exercise a call option on Series III and IV any time after 36 months from the date of allotment. The highest annual yield at 10.40% is for the 84-month tenor for Series V, where interest is paid cumulatively at the end of the tenor.
The issue has been rated AA (stable) by CRISIL and ICRA.
How to apply
You can only apply for these NCDs in dematerialized (demat) form. For applying, you need to submit an application form to your bank or broker, authorizing the intermediary to block the amount you want to invest.
The bank needs to be a self-certified syndicate bank (SCSB) (find the list of SCSBs here) Some banks or brokers will allow you to submit this form online.
Should you invest?
Only investors with a high risk appetite should consider investing in these NCDs. A debt mutual fund, despite a series of recent defaults and downgrades, will offer a less risky diversified basket of bonds and NCDs. “We do not generally recommend subscribing to the IPO of any NCDs rated below AAA. Those who wish to take the risk and buy NCDs should be aware that they can get better yields by buying NCDs of these companies already listed in the secondary market," said Deepak Jasani, head, retail research, at HDFC Securities.
Although NCDs are listed on stock exchanges, liquidity tends to be poor in these instruments. It is difficult to exit them before maturity, so make sure your time horizon is aligned with the tenure of the NCD you buy.
Amnish Aggarwal, head of research at Prabhudas Lilladher, also sounded a cautious note. “There is a major asset liability mismatch in the NBFC space. They are not getting funding from mutual funds like before and are, hence, tapping the retail market more aggressively. The recent Shriram Transport NCD issue also didn’t get as strong a response as its earlier issues," he said.
Investors should also be mindful that interest on NCDs is taxed at their slab rate which could be as high as 30%. However, there’s no tax deducted at source on the interest paid.
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