Non-convertible debentures in secondary market yield more

MUMBAI: Investors looking to invest in non-convertible debentures (NCDs) through the primary market currently have three options available.

Muthoot Finance, Manappuram Finance and Muthoot Fincorp, all Kerala-based gold-loan specialists, put together are raising Rs 1,000 crore via this debt instrument, offering interest rates as high as 12%.

Muthoot Finance’s issue with an AA-minus rating carries interest rates up to 11.5% while Muthoot Fincorp, rated A, is offering a maximum of 12% and A-plus-rated Manappuram, up to 11.75%. Investors can choose among monthly, annual and cumulative interest payment options with tenures ranging from 400 days to 75 months.

The interest rates offered by these non-banking finance companies (NBFCs) are 2-2.5% more than the rates on fixed bank deposits. But distributors say investors may skip these public issues as there are better deals available in the secondary market. “Investors can get issuances with a higher rating and yield from the secondary market,” said Rupesh Bhansali, head of distribution at GEPL Capital. For example, Muthoot Finance’s N6 series, which also carries an AA-minus rating but with a coupon of 12.25% and maturing in September 2016, trades at Rs 999, giving a yield of 12.33%. Similarly, Shriram Transport Finance’s AA-rated, 2016-dated NM series pays a coupon of 11.35%, and yields 11.06% at the current price of Rs 1,056.
However, there are problems while buying in the secondary market. In a new issue, units are typically offered at face value of Rs 1,000 and the coupon rate and tenure of the instrument are mentioned in the form. That means you have a clear idea of how much you can earn from the NCD when you fill the form. However, while buying it from the secondary market, you have to do your own calculations.

Due to multiple issuances from NBFCs and different rates to individuals and corportes, there are many series of the same company which are traded. For example, Shriram Transport Finance has as many as 37 series of NCDs trading in the secondary market. “These NCDs could be illiquid and hence, investors should buy them with an objective of holding till maturity,” said Jitendra Solanki, a certified financial planner.