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Betting on Shriram Transport’s NCD issue

Betting on Shriram Transport’s NCD issue

The non-banking finance company is once again taking the non-convertible debenture route, offering much higher interest rates than banks. Offer open for two weeks starting October 7.

Shriram Transport Finance Company (STFC) often takes the non-convertible debenture (NCD) route for raising finances. It has done so six times over the past five years, the last time being in July this year. The non-banking finance company is India’s largest truck financier and the NCDs are rated AA/Stable by Crisil and AA+ by Care. The issue opens on October 7 and is expected to close on October 21. Interest rates are far higher than any bank FD.

Issue details
STFC expects to raise Rs500 crore from the issue, 80% of which will be reserved for retail investors. Each bond will have a face value of Rs1,000, but the minimum investment is Rs10,000. The company is offering 11.25% for the NCDs with tenure of 36 months, 11.5% (60 months) and 11.75% (84 months). These NCDs are part of series I, II and III, respectively. JM Financial Institutional Securities Pvt. Ltd and AK Capital Services Ltd are the lead managers to the issue. These are long terms, but secured NCDs are liquid, which means you can sell them on the stock market before maturity.

Post-tax returns

Tax slab/Interest rate 11.25% (3 years) 11.50% (5 years) 11.75% (7 years)
10.30% 10.09% 10.32% 10.54%
20.60% 8.93% 9.13% 9.33%
30.90% 7.78% 7.95% 8.12%

Should you invest?
NCDs offer far better returns than FDs, which offer a maximum of 9.5% for three to seven years. This alone should make them attractive. However, while bank FDs are almost risk-free – banks tend to receive support from government and they’re even insured for up to Rs1 lakh – subscribing to any issue from a company entails some risk.
In STFC’s case, it has received a rating of AA/Stable by Crisil and AA+ by Care and has a track record of steady repayment. Sunil Wagle, CFP, Money Managers, says, ‘It is a good return, particularly for those in the lowest tax brackets, as these investments are taxed in the same manner as bank FDs. As for risk, the issue is of secured redeemable NCDs, which are to be paid out even before company FDs, which the company is currently offering as well. I would be more concerned about the tenure. If liquidity is a concern, stay away as these may not be traded frequently.’ If you’re in the higher tax brackets, the return on the 7-year NCD will be around 8%, whereas an FD’s would be 6-6.5%.

How they are taxed
Any interest you earn from an NCD is taxed the same way as an FD, as we’ve mentioned above. So it is subject to tax at your slab, under ‘Income from other sources’. If, however, you decide to sell the NCDs before maturity, capital gains would also arise. If you sell the investments in under 12 months, you would also have to pay capital gains tax at normal rates, while long-term capital gains (10.3% without indexation) would apply to any sale made in more than a year (indexation benefits don’t apply to NCDs).

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