10.64% ECL Finance secured NCD Dec 2018 – Should you invest or not?

ECL Finance is offering NCD’s that are opening for subscription from Dec 13th, 2018. These NCD’s offer a yield of up to 10.64% per year. In this blog post let us see what is NCD’s, how are the taxations, is it worth investing in this ECL Finance NCD and etc.,

What is a debenture and what are the types of debentures?

Debenture is a security instrument used primarily by corporates to raise money for a fixed interest rate. Debentures can either be convertible to shares after a certain period or non-convertible. The main advantage of debentures is they are win-win in terms of interest rate as the interest rate in debentures are lower than bank loan interest rate for companies at the same time for investors they offer higher interest rates than fixed deposits.

What are convertible and Non – Convertible debentures?

  1. Convertible Debentures: Convertible debentures are instruments that can be converted to shares after a pre-determined period. These are attractive for investors and company because, they can be converted to shares and the interest rate offered is typically lower than an NCD.
  2. Non – convertible debentures – NCD: Unlike CD’s (Convertible debentures) will be like fixed term deposits where they cannot be converted to shares instead the company has to pay the investors with principal and interest (if not paid earlier) at the end of term. Since these are non-convertible they carry higher interest rates than convertible debenture. 

What are secured and Unsecured NCD’s?

NCD’s are typically classified into 2 type.

  1. Secured NCD’s: Secured NCD’s are backed by company’s assets to fulfil the demands (Principal and interest) of the investors. Hence even if company is bankrupt the investors’ money can be recovered through sale of these assets. This ECL NCD is a secured NCD.
  2. Unsecured NCD’s: These NCD’s don’t have any backing. If a company gets bankrupted only the remaining money after paying secured NCD’s will be paid to unsecured NCD investors after the sales of assets.

How are NCD’s Taxed?

NCD taxation is based on how you sell and accounting method that you follow.

LTCG If you hold the NCD for more than a year and make a gain by selling it, it will be taxed under long term capital gain and taxed at 10% without indexation.

STCG If you hold the NCD for less than a year and make a gain by selling it, it will be taxed under short term capital gain and taxed at your income tax slab slab.

Cash Method Accounting:

Interest will be taxable as and when the interest is received.

Mercantile Method Accounting:

Interest income on NCD will be taxable as and when interest is accrued and due.

This income from interest will be shown as income from other sources in your IT filings.

Now let us review the ECL NCD.

Edelweiss NCD Issue 

Issue Opens Thursday, 13th December, 2018
Issue Closes Friday, 11th January, 2019
Registrar Link Intime India Pvt Limited
Listing On BSE
Issue Price Rs. 1,000 per NCD
Face Value Rs. 1,000 per NCD
Minimum Application Rs. 10,000/‐ only
Tranche I Issue Size Rs 1000 Crore
Credit Ratings “AA/Stable” by CRISIL and ICRA

Effective Yield (Per Annum) for Edelweiss NCD:

Series I II III IV V VI VII
Frequency Annual Cumulative Monthly Annual Cumulative Monthly Annual
Tenure 39 months 39 months 60 months 60 months 60 months 120 months 120 months
Coupon Rate 10.20% NA 9.95% 10.40% NA 10.15% 10.60%
Effective
Yield
10.20% 10.20% 10.42% 10.40% 10.40% 10.64% 10.60%

Review:

Risk return

This NCD offers a minimum return of 10.2% which is higher than bank FD interest by at least 3% on an average. However, this instrument carries a little higher risk comparing to bank interest rate.

Credit Rating

ICRA has rated as AA stable. Which is the 2nd highest rating indicating the default risk is comparatively lower.  However, this rating might change in future. Hence we cannot rely on the rating 100% and its indication of credit risk at present.

Liquidity:

NCD’s can be redeemed only after the predetermined period. IF you want to redeem early you should sell them in open market. This NCD would be listed in BSE exchange.  However, in case of Bank FD’s you can redeem it at any time.

Verdict: One can park in some part of your bank FD portfolio in this as it offers best interest rate in debt category. However, you should not be putting all your money in this as there is a chance of default risk.

How to buy?

This issue can be held only in demat format. Hence you need a demat account to subscribe this issue.  Use ASBA facility in your bank account to subscribe to this issue or contact your broker.

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