9.7% Shriram Transport Finance NCD Jan 2019 – Features and Review

9.7% Shriram Transport Finance NCD Jan 2019 will be hitting the market for subscription from 7th Jan 2019 to 31st Jan 2019. Is it worth to invest? Who can invest? What are the risks?

This is the third NCD offer from Shriram Transport Finance in this FY. The interest rate offered in current NCD is same as that of October 2018 Issue. However, slightly higher from the first NCD offer of the current FY.

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 Jan 2019 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.

9.7% Shriram Transport Finance NCD Jan 2019 – Features

Above I tried to explain all about NCDs. Now let us come back to this particular issue and understand the features of  9.7% Shriram Transport Finance NCD Jan 2019.

Shriram Transport Finance Company Limited (STFC) was established in 1979. It is mainly in commercial vehicle financing industry in India. The Company has been registered as a deposit-taking NBFC with the Reserve Bank of India since Sept 2000.

Shriram Transport Finance is the part of Shriram Group Of Companies. The Net NPAs as a percentage of Net Loan Assets was 2.83% and 2.66% as of March 31, 2018, and March 31, 2017, respectively.

Below are the features of 9.7% Shriram Transport Finance NCD Jan 2019.

# Issue Opening Date

7th January, 2019

# Issue Closing Date

31st January, 2019

# Interest Rate or Coupon Rate

The interest ranges from 9.12% to 9.70%  depending on the category of investor and tenure of the NCDs.

The initial allottees who are Senior Citizens on the Deemed Date of Allotment shall be eligible for an additional incentive of 0.25% p.a. provided the NCDs issued under the proposed Tranche are continued to be held by such individual investors on the relevant Record Date for the relevant Interest Payment date.

Senior Citizen Applicants making online applications through electronic mode should provide the copy of their PAN card by quoting their Application number, Demat Account number to the Registrar either through email / post / courier, for availing additional incentive applicable for Senior Citizens.

Other Senior Citizen Applicants, applying by submitting the application form physically through the Designated Intermediaries at the respective Collection Centres/ SCSBs, should enclose the copy of PAN Card along with their application, for availing additional incentive applicable for Senior Citizens.

# Issue Size

The base Issue size is Rs.200 Cr (with an option to retain over-subscription amount of up to Rs.500 Cr for Tranche-III.)

Mode of Issue

Only in Demat form.

# Face Value

Rs 1,000.

# Tenure Options

3 Yrs, 5 Yrs and 10 Yrs.

# Frequency of Interest payment

Monthly and Annually. However, cumulative option is available for both 5 Yrs and 10 Yrs NCDs.

# 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 and NSE stock exchanges.

# Security & Asset Cover

The Company and Promoter will create and maintain appropriate security in the favour of the Debenture Trustee for the NCD Holders on the assets adequate to ensure required asset cover for the Secured NCDs.

# Credit Ratings

The NCDs have been rated ‘CRISIL AA+/Stable’ by CRISIL for an amount of up to Rs. 5,000 Crores and ‘IND AA+: Outlook Stable’ by India Ratings and Research for an amount up to Rs. 5,000 Crores.

# Put and Call options 

No Put & Call options are available.

# Security and Asset Cover

The Company and Promoter will create and maintain appropriate security in favour of the Debenture Trustee for the NCD Holders on the assets adequate to ensure required asset cover for the Secured NCDs.

# Issue Allocation Ratio

40% of the Issue is for retail investors and 40% for HNIs (HNIs – individuals (applying for an amount of > Rs.10 lakh).

NRIs are not eligible to apply to this NCD issue.

Below is the rate of interest chart of 9.7% Shriram Transport Finance NCD Jan 2019.

9.7% Shriram Transport Finance NCD Jan 2019 Coupon Rates

9.7% Shriram Transport Finance NCD Jan 2019 – 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.

# Additional Interest for Senior Citizens

As I mentioned above, there is a 0.25% additional interest rate for Senior Citizens. This may be a better opporunity for those senior citizens who are looking for long term fixed yearly income.

# 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.

Check cautiously about the company financials also. Better to track of past history of around at least 5 years. Also, check the management values and who is managing the company.

How to apply for 9.7% Shriram Transport Finance NCD Jan 2019?

9.7% Shriram Transport Finance NCD Jan 2019 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.

28 Comments

  1. Those private companies selling NCDs to people as Fixed deposit.

    Reply
      • What about security of fixed deposit with private bank. What if a private bank goes bankrupt?? Is bank fixed deposit especially from private bank considering small is really a secure option then these NCDs?? Please share your views.

        Reply
  2. I HAVE BEEN ALLOTED THESE NCDS WHEN THEY ARE EXPECTED TO BE LISTED

    Reply
  3. Dear BasavRaj, do you have any suggestions on perpetual bonds? I got a mail from Karvy saying perpetual bonds available with interest rate of 11.3%. Bond issued by Karnataka bond. If I invest here and want to exit afer 2 or 3years, do you think I can easily find a buyer?

    Reply
    • Dear Kalyan,
      Just think why they are offering such high coupon rate?

      Reply
      • So risk is high?

        Reply
  4. Quick question – if you use cumulative option of the 3/5 year NCDs, is the profit generated at redemption treated as interest or capital gain – basically which tax rate would apply.

    Reply
    • Dear Ack,
      I cleared that point in above post. It is the LTCG and taxed at 10% without indexation benefit.

      Reply
      • Is we have to pay Ltcg tax even we are below taxable income??

        Reply
  5. Dilemma Dilemma Dilemma… Which one to invest among these two NCD in this January, 2019, SREI Infra or Shriram Transport Finance, both for option of 10 years, Annually Interest, and which one is relatively more safe? ?

    Reply
    • Dear Pinaki,
      Both are for me equally GOOD and BAD. Hard to say blindly without knowing much about your financial life and requirements.

      Reply
  6. Hey!! Nice informative post. I want to subscribe to your newsletter but I’m not able to find a way to submit my Email.

    Reply
    • Dear Jay,
      It is already there at right side of the blog. Please use the same.

      Reply
  7. Will you put your hard earned money in these NCDs?

    Reply
    • Dear Vignesh,
      Whether my RISK appetite is same as YOUR’S? It is different right? Then how can my investment in such NCDs may or may not matters you? Here, I am giving you the complete picture of opportunities as well as risk. Rest is left with an individual to decide.

      Reply
  8. “…Assume your corpus is around Rs.5 Cr and you are completely relying on this corpus to survive monthly…
    refer to your statement above.
    If one has a corpus of 5 cr , he will get a bank fd interest of Rs 2.5 lakhs monthly , and can lead a flambouyout and luxurious life. Nobody will have such a corpus in India. Please do not mislead people with false assumptions. Most people may have a corpus of only about 50 lakhs.

    Reply
    • Dear Guest,
      I have many clients whose networth is 5 times of Rs.5 Cr and they are not living the so-called FLAMBOYANT life :)Therefore, if you have not met such individual, it does not mean there are no such individuals on this earth.

      Reply
    • Why do you feel so? If someone had invested an average of 3000 rs per month for 40 years into the index to get an average of 13% returns, he would have had 5 cr.

      Reply
      • Dear Varun,
        Do anyone on this earth have that PATIENCE to get invested and SIT CALMLY for 40 years??

        Reply
  9. You never really answered the question in your view whether you would recommend to invest in NCDs of Shriram Transport or not and if so why? The blog is useful for retail investors who don’t have any background on finance but not particularly useful for who are looking for recommendation..

    Reply
    • Dear Bharat,
      My risk-taking ability is different than yours. Same way, I can’t BLINDLY recommend that one must INVEST or not. My job is to share the features and the risks. Rest is completely left with readers.

      Reply
  10. I have a specific query:
    Whether the 10-year tenure option is ‘Secured’ Bonds or ‘Unsecured’ Bonds?

    Reply

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