Tata Capital Financial Services Ltd has announced the issue of secured and unsecured redeemable non-convertible debentures (NCDs). The issue, which will give an annual coupon or interest rate of up to 8.85%, will be open from 13-23 August. The NCDs are being offered for tenors of three, five, eight and 10 years with annual interest payments.
The NCDs have been rated AAA (Stable) by CRISIL and CARE Ratings. The minimum investment amount is ₹10,000 and additional investment can be made in multiples of ₹1,000, thereafter.
The base issue size is ₹500 crore with the company keeping the option of retaining another ₹3,626 crore in case of over-subscription. Tata Capital is a non-banking finance company (NBFC) engaged in various types of lending, including loans to corporates such as working capital loans, term loans and construction equipment finance and consumer loans like auto loans, loans against property, personal loans and so on. As of 31 March 2019, the total loans outstanding issued by Tata Capital was ₹44,623 crore. It had gross non-performing assets (NPAs) of 2.45% and net NPAs of 0.39%. Gross NPAs of NBFCs as a whole were much higher at 6.6%, as on 31 March 2019, according to Reserve Bank of India’s (RBI) financial stability report. Net NPAs were also dramatically higher at 3.7%.
The NCDs are being offered at coupons of 8.45%, 8.50%, 8.65% and 8.85% for tenures of three, five, eight and 10 years, respectively. All coupons will be paid out annually. These rates are applicable to retail and high net-worth individuals.
The company is offering secured NCDs up to ₹2,998 crore and unsecured subordinate NCDs up to ₹1,128 crore. The unsecured NCDs are being offered for a 10-year tenure and coupon of 8.85%. However, this rate is only slightly above the rate of 8.65% offered on the secured NCDs with tenure of eight years. The security in question is identified immovable property, book debts, loans, advances and receivables (present and future) of Tata Capital.
The company proposes to list the NCDs on the stock exchanges within six days of the issue. They will be issued and traded in dematerialized (demat) form only. There is no put or call option on the NCDs by the issuer. In other words, they cannot be recalled prematurely.
Should you invest?
Tata Capital has a strong and well-established reputation in the NBFC space. The NCD issue has also been rated AAA, unlike two other recent issues by JM Financial and IIFL, which received an AA rating (they offered higher interest rates though).
That said, NCDs are an undiversified instrument carrying a high level of risk. They also have low level of liquidity. Despite being listed on the stock exchange, it is difficult to transact in them. Only investors with a high level of risk appetite should subscribe.
You can minimize your risk, though, by opting for the shortest tenor and sticking to secured NCDs only. In this case, the interest rate gap between secured and unsecured NCDs is just 0.20%. Also, be cognizant of how much more you are getting in interest for the risk you are taking. At present, State Bank of India (SBI) is offering an interest rate of 7.20% for fixed deposits of three to five years and 7.10% for five to 10 years’ FDs, which means for the risk you are taking in buying the NCD will fetch you only 1.5-2% more per annum.
While interest paid in both FDs and NCDs are taxable at your slab rate, you get a marginal benefit on NCD interest income because tax deducted at source (TDS) is not applicable on NCDs held in demat form.