10.64% ECL Finance NCD Dec 2018 – Features and Review

10.64% ECL Finance NCD Dec 2018 will hit the market on 13th Dec 2018 to 11th Jan 2019 for a subscription. Is it worth to invest? Who can invest? What are the risks?

There are series of NCDs coming up every month in the market. At the same time some negatives news also for few NCDs (take an example of the IL&FS saga). A lot of issues going on in NBFC space. In such a situation, is it worth to consider these NCDs worthy to invest?

Many may be desperately looking for high fixed return products (especially the pensioners) to compensate from the low yielding bank FDs. However, try to understand the risks involved in such products at first.

Before jumping into understand this 9.7% Shriram Transport Finance NCD Oct 2018, let us first understand more about NCDs. I have already written a detailed post on this aspect (NCD (Non-Convertible Debentures) – Who can invest?). I will copy paste the same post here for your better understanding.

What are debentures?

Debentures are nothing but you are lending the money to the company. In return, the company is promising you the interest rate and return of principal at the specified time period. Then what is the difference between debentures and bonds?

In the case of India, the difference between bonds and debentures are same. However, there are slight differences only the reasons for which companies borrow money from us (investors). Usually, bonds are meant for long-term company’s borrowing. However, debentures are meant for meeting short-term company’s requirement.

Types of Debentures

Let us now understand the different variants of debentures.

Convertible and Non-Convertible Debentures

Convertible debentures mean after the specified time, these debentures are converted into shares (stocks) of the company. Up to that conversation, you will enjoy the fixed specified coupon (interest rate) on such debentures. After that, your earnings depends on price appreciation of the stock or the dividend income you receive (if the company declares it).

Non-Convertible Debentures, on the other hands, will never be converted into shares (stocks) of the company. Investors who invest in such non-convertible debentures will enjoy fixed interest rate up to maturity and after that return of principal (exactly like Bank FDs).

Secured and Unsecured Debentures

Now within debentures, there is one category like secured and unsecured debentures. Secured debentures mean companies while borrowing money from you usually along with a promise to repay the interest and principal timely, put up some asset (such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders) as surety for the loan.

Secured means in case of the company goes bankrupt or goes something wrong, the company will sell such asset and repay you the money. Hence, secured debentures are usually safer than unsecured.

In case unsecured debentures, if the company goes bankrupt, then you will get the money when all such secured debtors amount is paid back. Hence, unsecured debentures are risky than secured and also because of such risk they offer a higher interest rate to you than the secured.

Call and Put Option in Debentures

There are one more variants in case of debentures and they are usually called as Call or Put Option Debentures.

A CALL option means the company has an option to ask the investor to surrender the debenture after a certain period to them. In such a situation, the company will pay back the principal to you.

Usually, companies exercise this option if interest rates go down, and the company can get funds at lower rates from the market. In such a situation, instead of paying you a higher interest rate, companies can exercise this call option and go for a cheaper loan.

On the other hand, a PUT option means that the investor has an option to surrender the debenture if he wants to, and get back his principal.

Suppose if interest rates go up and what you are receiving from your debenture is offering you lesser interest, then you can exercise this option and get back your money to invest somewhere else. A put option gives a lot of flexibility to the investor – if interest rates go up, and he can get better rates from the market.

Do remember that such CALL and PUT options are available to investors after holding the debentures for certain periods. Also, companies give you a time period to accept or exercise such options and within that period you have to exercise it.

Taxation of NCD (Non-Convertible Debentures)

# Interest Income

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.

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

Hence, interest income is treated as “Income from Other Sources” and treated accordingly.

# Short Term Capital Gain

If you held the debentures for less than a year and sold it in the secondary market, then any such gain from this selling will be taxed according to your tax slab.

# Long Term Capital Gain

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.

NCD (Non-Convertible Debentures) – Who can invest?

Many of us blindly invest with the lure of high returns from such debentures. As I told you earlier, currently few NCDs are offering you high-interest rate than banks.

Advantages of NCD (Non-Convertible Debentures)

  • These are good if you are looking for a constant stream of income. Do remember that few NCDs offer you to return interest and principal at maturity itself. Hence, in such a situation, they act like typical FDs for you.
  • Usually offers higher interest rates than the Bank FDs.
  • These NCDs are listed in stock exchanges. Hence, in the case of liquidity, you can sell it in the secondary market.
  • Interest will be directly credited to your bank account. Hence, the ease of managing money.
  • There will not be TDS (Tax Deducted at Source) for these NCDs if you held them in Demat format. Hence, in this feature, they have an edge over Bank FDs.
  • It will give you diversification to your debt portfolio.

Disadvantages of NCD (Non-Convertible Debentures)

  • Credit Rating-Never trust the current credit rating and jump into investing. Credit rating may change at any point of time based on the company’s financials. Hence, beware of credit rating.
  • Liquidity-Even though such NCDs are listed in the secondary market (like BSE or NSE), they are very thinly traded. Hence, you may face the liquidity issue.
  • Post Tax Returns-Always check for post-tax returns on the interest you will receive. The formula to calculate the same is given below. Hence, a 9% NCD may not be the same for 10%, 20% or 30% tax slab individuals.

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

  • Why a company needs the money-Check why they need the money? Why they are offering you higher interest rates than Bank FDs. If it is not possible to gauge the same by you, then knock the experts’ door and then only invest.
  • HIGH RETURNS MEANS HIGH RISK-As I said above, if they are offering you the highest interest rate than Bank FDs, then there is always a risk involved. Mere SECURED DEBENTURES means not fully secure that you will get the money the next day after the company goes bankrupt.
  • Check Financial Statement-Check financial statement of the company for the like how much % of their total asset the company allocating for unsecured loans, Capital Adequacy Ratio (CAR), how much % of their total asset is set aside for the NPAs (non-performing assets) and like interest coverage ratio.

10.64% ECL Finance NCD Dec 2018 – Features

Above I tried to explain all about NCDs. Now let us come back to this particular issue and understand the features of 10.64% ECL Finance NCD Dec 2018.

ECL Finance is the leading systemically important non-deposit taking NBFC. It offering a broad suite of secured corporate loan products, retail loan products which are customized to suit the needs of the corporates, SMEs and individuals. Its retail loan products include like Structured Collateralised Credit, Wholesale Mortgages, SMEs and others, loan against securities, retail mortgages like a loan against property and agricultural credit.

Below are the features of 10.25% JM Financial NCD Nov 2018.

# Issue Opening Date

13th December, 2018

# Issue Closing Date

11th January, 2019

# Interest Rate or Coupon Rate

The interest ranges from 10.20% to 10.64% depending on the category of investor and tenure of the NCDs.

# Issue Size

The base value of the issue is Rs.250 Cr with an option to retain another Rs.750 Cr totaling to Rs.1,000 Cr.

Mode of Issue

Demat

# Face Value

Rs 1,000.

# Tenure Options

39 months, 5 years and 10 years.

# Frequency of Interest payment

Monthly/Annual. A cumulative option is also available.

# Minimum Application size

Rs 10,000 (or 10 NCDs) and in multiples of Rs.1,000 thereafter.

# Listing

The NCDs are proposed to be listed on BSE stock exchange.

# 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

These NCDs have been rated by CRISIL as ‘CRISIL AA/Stable’ which indicates a Stable outlook. Also, these NCDs have been rated by ICRA as ‘ICRA AA (stable) which indicates as Stable outlook.

# Issue Allocation Ratio

QIB-20% of the Issue, Corporate-20% of the Issue, HNIs-30% of the Issue and Retail-30% of the Issue.

# Put and Call options 

No Put & Call options are available.

NRIs are not eligible to apply to this NCD issue.

Below is the rate of interest chart of 10.64% ECL Finance NCD Dec 2018.

10.64% ECL Finance NCD Dec 2018 Coupon (Interest) Rate

10.64% ECL Finance NCD Dec 2018 – Should you invest?

I have already covered the full part of who can consider such NCDs. However, considering the recent frequent change in Credit Ratings of the companies by these credit companies, it is hard to believe and invest blindly. Hence, I thought to add few more points here.

# NCDs are not like Bank FDs

Do remember one thing that NCDs are not like typical Bank FDs, where you invest now and regularly receive the monthly or yearly interest payment and at the end, you get the principal.

The risk is more in case of NCDs even though they claim to be secured.  Hence, your return of principal and interest depends on the company’s financials. Hence, never compare your Bank FDs with NCDs.

# Repeating again…Credit Rating may change at any time

Take the case of IL&FS issue. It was highly rated and suddenly downgraded within a few months. What will happen to investors don’t know. Even though IL&FS issued secured NCDs, the possibility is high that you may get interested and principal after the deadlines.

Hence, never ever trust the credit ratings and invest.

# Take a calculated RISK

Take the calculated risk. How? Invest around 10% of your debt portfolio into such NCDs. Never invest all your debt portfolio under single NCD. Assume your corpus is around Rs.5 Cr and you are completely relying on this corpus to survive monthly, then not invest more than 10% such corpus in NCDs and that also never in a single NCD.

# Company’s Financials may change without our notice

Even if we believe credit rating remained the same, but it is hard for retail investors to follow company financials regularly. Hence, without our notice, there may be a change in financial situations or NPAs. Hence, diversify your risk in different NCDs rather than sticking all money in a single issue.

# Company Financials

Company’s top 20 borrowers have an exposure of 24.16% of total exposure as on March 31, 2018. Company’s inability to maintain relationships with such customers or any default and non-payment by these borrowers may highly impact the company’s financials.

The company is subject to supervision and regulation by the RBI, as an NBFC-ND-SI, and other regulatory authorities and changes in the RBI’s regulations and other regulations, and the regulation governing company or the industry in which company operates could adversely affect its business.

How to apply for 10.64% ECL Finance NCD Dec 2018?

10.64% ECL Finance NCD Dec 2018 is available in Demat form only. Hence, you must have a demat account (if you not have the same). You have to then apply through the broker for the same.

9 Comments

  1. Hi Have a question here can we buy this NCD online from trading account like sharekhan or zerodha as we have Demat account linked there? OR is is seperate online portal for each company NCD where we give Demat account and then buy

    Reply
    • You can buy it via ASBA from your bank via net banking/ physical form submission. You can also opt for physical certificate and pay via cheque

      Reply
  2. Hi Basu, I really appreciate that you write up your view for every NCD. In every write up you give basic information for a first time reader also instead of just giving too many links, highly appreciated. As requested by many people and myself can you please write an article listing good NCDs and your suggestions on top 3 to 5 NCDs. This would help more for layman like us and pick up one of two from your list and invest some amount. This is kind request

    Reply
  3. Seems very basic type of write up.Very little details about companies financials & risk under this company. Further the existing debentures of same company is available at discount in secondary market,despite accumulated interest for 4& half month interest.

    Reply
    • Dear Hemant,
      I don’t want to complicate layman by going deep. I explained the basic risk factors. It is up to the investors to decide. Regarding high yield current bond, the reasons are known when the yield increases if one is aware of how the bond market works.

      Reply
      • Good information provided by Mr.Basavaraj which is understood by lay men like me. Thank you.

        Reply

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