Tata Capital NCDs

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In 2009, most investors favoured the five-year secured non-convertible debentures (NCDs) of Tata Capital, a non-banking finance company (NBFC) of Tata Sons. Pune resident Ketan Gandhi was no different. He invested ~10,000 to cash in on the 12 per cent returns the company, the only one then, was giving on its annual interest payout option.

However, there was a put-call option that came with the issuance after three years, which ended in January 2012. This is when Tata Capital decided to reduce its coupon rate on the NCDs to 10.5 per cent. The downward rate revision is effective from March 6, 2012 for monthly, annual and cumulative interest payment options and September 6 for the quarterly option.

A Put option gives the opportunity to the investor to redeem his NCDs and a Call option gives the right to the company to call back the NCDs (or redeem investors' money). The company's NCD holders last week approved the resolution in majority, said a company spokesperson.

Obviously, if your decide to stay invested, you will have to take a cut in the interest income. For instance, Gandhi will earn 1.5 per cent or 150 basis points less if he wants to continue holding the NCDs. The other option is to exit.

If you wish to exit, Tata Capital will provide you with a one-month window when you can redeem the NCDs. "The NCD holders will be sent an option letter, latest by next week. They will then have to reply to the same specifying their decision. Those who wish to redeem the NCDs will get time, starting the second week of March," said a senior Tata Capital executive. Industry experts say investors can tender their NCDs between March 23 and April 5. And the company would pay interest also for the period between March 5 and redemption.

You are most likely to be unsure about your action. Common knowledge says the revised rates, though lower by a per cent, are in line with the rates available in the market. And those looking for a higher rate will be disappointed. Tata Capitals decision is just a sign of the interest rate cycle reversal, according to industry experts. And they feel these rates will find takers.

Assuming most invested in the issue for assured returns. The first option for those wanting to exit could be bank fixed deposits. But, Tata Capitals 10.50 per cent is higher than most fixed deposit rates. Consider this: State Bank of India is giving 9.25 per cent for one- to ten-year deposits. ICICI Bank is offering 7.75 to 9.25 per cent across similar tenures.

Company deposits may be another options that would yield high returns, But here, not many issues are AAA rated and hence not dependable. HDFC is offering 9.50-9.75 per cent for one to three-year deposits, ICICI Home Finance is giving nine per cent for the same tenures and LIC Housing Finance nine to 9.50 per cent. (Source: Bluechipindia.com).

But, some others don't favour retaining the NCDs on the back of rate surprises. Sell out of the NCDs and invest in some other products giving fixed returns for the investment period, depending on your goals. You should not commit to long-term investments as medium- and short-term ones are offering a better opportunity with a good mix of liquidity and high returns. Short-term debt funds have given 9.74 per cent returns in a year, as on February 17, 2012

A cut in interest rates will push up bond prices and NAVs of short- to medium-term debt funds. Otherwise, he suggests buying tax-free bonds that come without put options. For instance, NHAIs bonds selling at ~1,036.88 (8.20 per cent) on the Bombay Stock Exchange and ~1,039.74 (8.30 per cent).

But, these rates are only pre-tax. If Gandhi retains the NCDs, his real return will work out to be 7.35 per cent in the highest tax bracket (for 10.50 per cent). The same will apply for deposits, the interest will be added to your income and taxed.

 

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