Edelweiss NCD starts today offering interest rate of 9.7%. Should you invest?

Edelweiss Financial Services has announced the public issue of Secured Redeemable Non-Convertible Debentures (NCDs) for Rs 400 crore with a coupon rate of 9.7%. The issue opens on Thursday and closes on April 23, 2021. The proceeds from the public issue will be used mainly to retire its debt.

The issue gives an option to choose from seven series of NCDs carrying fixed coupon and having tenures ranging from 36 months, 60 months and 120 months with annual, monthly and cumulative interest option. Effective annual yield for NCDs having fixed interest rates ranges from 9.09% to 9.7%.

According to the statement issued by the company, at least 75% of the funds raised through the issue will be used for the purpose of repayment and pre-payment of interest and principal of existing borrowings, and the balance is proposed to be utilised for general corporate purposes.

“These are secured NCD and rates ranges from 9.1% for 36 months to 9.7% for 120 months. Rating of AA- by brickwork means financials are not that strong. Given the rating, one should be very careful in allocating any large sums into such NCDs. Liquidity usually is low in such bonds and that’s why bid-ask spreads are also high. They are offering cumulative and non-cumulative option and if held till maturity, they will be taxed at a marginal tax rate,” said Lovaii Navlakhi, founder, International Money Matters, a wealth management company.

In another development, Paras Kuhad, former additional solicitor general of India, had alleged that Edelweiss Group, the controlling shareholder of Edelweiss Asset Reconstruction Co (EARC) diverted at least Rs 1,800 crore from EARC.

Liquidity and Taxation of NCDs

NCDs, as the name suggests, cannot be converted into equity shares at the time of maturity. It generally offers higher interest rates than fixed deposits as they carry higher risks. There are two types of NCDs — secured and unsecured. At the time of liquidation secured NCDs are preferred over unsecured NCDs. Because of higher risks, unsecured NCDs offer a higher rate of interest than secured ones.

Investors go in for FDs mostly because of higher liquidity. NCDs, on the other hand, is listed on the BSE and NSE. Though these bonds are tradeable on exchanges but are low on liquidity score. Moreover, interest income on NCDs is just like bank deposits. However, if they are sold within one year then the capital gain is chargeable to tax. For NCDs sold after a year of allotment long-term capital gain is levied. Short term capital gain is taxed according to your tax slab. So these are not tax-efficient unless someone is opting for the cumulative option and try to sell in the market after one year where the tax rates applicable will be 10%(long term tax rate for the listed securites). This certainly offers good rates in absolute terms, but this is like a credit risk in the portfolio.

Should you subscribe?

The issue has been rated AA with a negative outlook by Acuité Ratings & Research and AA- with a stable outlook by Brickwork Ratings. Experts say the risks are higher and therefore it offers a higher coupon rate.

Navlakhi said, “So it is right to compare this with the credit risk mutual funds. Looking at few credit risk funds with the largest AUM, net rates are over 6.5% approx. and post-tax will be around 6% (with a 4% inflation rate) and this NCD will give around 6.35% to 6.8% post-tax, depending on which series one buys (assuming 30% tax bracket). Considering this, it is not very lucrative for high tax bracket investors to look at it and it is better to diversify this credit risk via a mutual fund where the fund manager is also actively looking at the portfolio. For small investors, one should be very careful about their allocation into this. Even if some is looking at this, it is better to go with a 3-year option rather than 5 years as there is uncertainly about their financials and not just look at high yields.”