Firms rush to NCD market to woo retail investors

Retail non-convertible debentures (NCDs) are the flavour of the season as companies, especially the non-banking finance companies (NBFCs), are flocking to the debt market offering attractive rates of interest for long-term money.

About Rs 60,000 crore of retail NCDs are expected to be raised by the end of fiscal 2018-19 as against Rs 4,500 crore invested by retail investors in 2017-18.

The interest rates on offer on these retail NCDs are between 9% and 11%, which are more attractive than the retail term deposits by at least 3% to 4%. NCDs are fixed return debt instruments that aim to pay you a regular return on your instruments, either monthly, quarterly or annually.

The big retail NCD issuances that are likely to hit the market in the remaining part of the current fiscal include L&T Finance (which is planning to raise about Rs 5,000 crore with a base issue size of Rs 1,000 crore and an option to retain an overscription up to Rs 4,000 crore), Shriram Transport (planning to raise Rs 700 crore with a base issue of Rs 200 crore and an option for oversubscription of Rs 500 crore), India Infoline Ltd (which is planning to raise Rs 750 crore) and a bumper bond issuance of Rs 10,000 crore from National Highways Authority of India (NHAI).

Vikas Shinde, senior vice-president - debt capital market, Axis Bank, said the retail participation in the NCDs has been very encouraging with the interest rates being attractive. "With interest rate on the retail NCD ranging from 9% to 10.60%, the returns are well above the bank deposits by at least 3% to 4%." The interest rates range from 3.5% in the savings bank account to 7.5% for a one-year to ten-year bank deposits.

Mahindra Finance became the first NBFC to announce its retail NCD issuance in January 2019. The company plans to raise Rs 3,500 crore. The base issue size is Rs 500 crore with an option to retain over subscription of Rs 3,000 crore. The coupon rates for this bond issue ranges from 9% for a 39-month NCD to 9.50% for a 120-month NCD, which is not secured. Even though the returns on the NCDs are taxable, high coupon rates offset this payout. Fixed deposit accounts with a lock-in period of five or 10 years are eligible for deduction in income tax under Section 80C of the Income Tax Act.

Ramesh Iyer, vice chairman and managing director, Mahindra Finance, said, "We have a strong balance sheet and the rates of interest are very attractive which is expected to attract retail investors. The money will be utilised for on-lending activities."

With credit offtake still to pick up, banks have not been able to raise the interest rates on deposits. NBFCs generally source 10% to 15% of their funding requirements from the mutual funds and about 60% of the funding requirements from the banks and the remaining from the debt market.

In the calendar year 2018, companies mobilised Rs 29,394 crore through NCDs, as per the Securities and Exchange Board of India (Sebi) data, higher than the Rs 9,779 crore raised through this route in the previous year.

Ajay Maglunia, executive VP (fixed income) at Edelweiss Finance, said, "Retail offers can get long-term money, which is the prime requirement of the NBFCs so that there is no asset-liability mismatch. And investors get a high coupon rate."

According to a survey conducted by Reserve Bank of India, the share of fixed deposits (term deposits) declined from 57.7 % in 2016 to 52.5% in 2018. Bank deposits have remained the preferred instrument of household savings in financial assets, followed by provident and pension funds, and life insurance fund.