Another non-convertible debenture (NCD) is up for grabs in the market. L&T Finance Ltd, a non-banking finance company(NBFC) that is part of the L&T Group, has announced the issue of secured NCDs that will remain open from 6 to 20 March. In the last 2-3 months, around six different public issues for NCDs, offering an annual interest rate in the range of 9-10.25%, have been launched. Read more here.
The L&T Finance NCDs are available at coupon or interest rates in the range of 8.98% to 9.35%, for retail and high net-worth investors (HNIs), across various tenors. The interest rate you get will vary according to the tenor and payout option, monthly or annual, that you choose.
The issue size is ₹500 crore but the company may retain another ₹1,000 crore in case the issue is fully subscribed. The minimum application amount is ₹10,000; thereafter, you can apply in multiples of ₹1,000.
The NCDs have been assigned an AAA rating by CARE Ltd, India Ratings and ICRA Ltd. While 30% of the NCD issue has been reserved for HNIs, 30% has been kept for retail investors. The latter have been defined as those applying for NCDs up to₹10 lakh and HNIs as those applying above the limit for retail investors. See more details on the NCD.
You need a demat account to invest in the NCD. You can apply online if you have an online trading account or submit a physical form to your stock broker.
Should you invest?
Experts are divided on the investment case in the NCD. Deepak Khemani, a Mumbai-based wealth manager, came out in favour of the NCD, noting the AAA rating and the issuer’s strong financial background.
However, Mrin Agarwal, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra, pointed to the concentration risk in NCDs as a product (too much money lent to a single issuer) and the fact that the interest payment on NCDs is fully taxable.
The interest paid on an NCD is fully taxable at your slab rate. For example, if you fall in the 30% slab and earn ₹93,500 per annum in interest on an investment of ₹10 lakh, you will have to pay 30% of ₹93,500 in tax along and health and education cess. This comes to ₹29,172.
In comparison, debt fund gains are taxed at 20% if they are held for more than three years, and also come with the benefit of indexation.
If you subscribe to the NCDs in demat form, you will not need to pay TDS (tax deducted at source) under Section 193 of the Income-tax Act, 1961.
NCDs are suitable for investors who want to earn a fixed interest rate. In that respect, they are similar to bank fixed deposits and offer more certainty than debt funds which have variable returns. The rate on L&T Finance NCD is higher than the prevailing FD rates, but investors should note that NCDs can carry much higher risk than bank FDs or diversified mutual funds.
It should also be noted that recent cases of corporate distress such as the IL&FS defaults have dented confidence in India’s debt market.
Tread carefully while investing in such products and invest only a small portion of your portfolio in them.