Shriram Transport is the latest company to offer a debt issue, and they’re going to offer NCDs (Non Convertible Debentures), to retail investors which offer interest rates from 11.35% to 11.60% per annum in the reserved category.
The issue size is Rs. 500 crores (with an option to issue additional Rs. 50o crores if there’s demand), and they have divided applicants into three categories.
The prospectus shows that the company already has secured debt of 14,869.37 crores, and the money raised from this issue will add to the existing secured debt.
Retail investors come under the third category, and as long as their application is for bonds worth less than Rs. 5 lacs, they will be considered under the portion reserved under the retail category, and offered the slightly higher interest rate of 11.60% p.a. for 5 years, or 11.35% p.a. for 3 years.
Shriram Transport NCD: Open and Close Date, and Credit Rating
The issue opens on June 27 2011, and closes on July 9 2011. Going by past issues – I think online brokers will give you an option to invest in these, but that will perhaps not start on day one itself.
The issue has been rated AA/Stable by CRISIL and CARE AA+ by CARE, which for whatever it’s worth is a good rating. Further, these are secured debt instruments so that lends them additional safety as well.
Interest Rate and Options of Shriram Transport NCD
They have kept things simple by having only an annual interest rate payment option (no cumulative option), and two series – one for 5 years, and another for 3 years.
Here are the interest rates and other details of retail reserved category.
| Details |
Option 1 |
Option 2 |
| Tenor |
60 months |
36 months |
| Interest Rate |
11.60% |
11.35% |
| Put / Call Option |
Exercisable after 48 months |
NA |
| Interest Payment |
Annual |
Annual |
The Put / Call Option means that at the end of 4 years you can redeem the bonds with the company, or Shriram Finance can redeem them if they so desired.
As far as I know, this is the first issue in which a company has given this option to the investor. Normally, they keep this option for themselves, but the investors don’t have it.
Minimum Investment and Compulsory Dematerialization
Each bond has a face value of Rs. 1,000 and you have to invest a minimum of Rs. 10,000 after which you can invest in multiples in Rs. 1,000 each.
These will be compulsorily in Demat form, so you need a Demat account to invest in these, and can’t hold them in physical form.
One series has a tenor of 5 years, and another tenor of 3 years, but they will both list on the NSE (National Stock Exchange), so if you needed money before maturity – you could sell them in the open market.
However, prices vary in the open market, and if interest rates rise much further then you may even get less than the face value of these bonds.
TDS on Shriram Transport Finance NCD
Since these bonds will only be issued in demat form, and trade on a stock exchange – tax will not be deducted at source on them.
However, this doesn’t mean they are tax free. They will attract tax, just that it won’t be deducted at source. Also, they don’t have any tax benefits at all.
Conclusion
You need to look at it in two parts, – first is attractiveness of offer, and second is security of your money.
Shriram Transport Finance is offering a reasonably good interest rate for the medium term (3 – 5 years).
While banks offer a high interest rate for the short term, they aren’t willing to let you lock on to the higher rate for a period of 5 years or so.
Thinking about safety of money becomes tricky. You can look at smaller companies and decide that the extra percent or two is not worth the risk, or you can look at bigger companies and think that this is safe, but companies like Shriram Transport Finance are a bit harder because they’re somewhere in the middle.
The promoters own a large chunk of the company (slightly more than 40%) so that’s a good sign, there are no pledges on their stock which is a good sign, and the company has been rated well by the issuers which is also a good sign.
However, I’ve always felt that it’s better to be diversified and not expose yourself too much to one stock or one company’s fixed deposit. If something does go wrong, then the loss should not bring your entire portfolio down with it, but should be something that you can deal with and hopefully replace with the other investments you have.
In good times such as these, it’s sometimes hard to think what can go wrong, but you all know too well things do go wrong all the time.
In fact, in the prospectus of this issue itself, they have mentioned a time in 1998 when the BSE suspended trading in their shares due to non – compliance. How would you feel if that were to happen, and you had 50% of your money stuck in this deposit?
So, I’d say keep these things in mind while making your decision, and as always, all questions, comments and observations are welcome!
No. of Bonds Applied >>> No. of Bonds Allotted
10 >>> 3
20 >>> 6
25 >>> 7
30 >>> 8
50 >>> 14
100 >>> 28
200 >>> 55
300 >>> 83
400 >>> 111
500 >>> 138
Allotment is approx. 27.7% (100/3.61) of Retail Application Money.
Hi.. Basis of Allotment for Retail Investors upto Rs. 5 Lacs is out:
No. of Bonds Applied No. of Bonds Allotted
10 3
50 14
100 28
200 55
300 83
400 111
500 138
Allotment is approx. 27.7% (100/3.61) of Retail Application Money.
Thanks for this note Shiv. I think I’ll create a post out of all this info you have provided.
Final Subscription Figs. of Shriram Transport NCD: QIB – 1.10 times, Corporates – 0.56 times, Retail upto Rs. 5 Lacs – 5.44 times, Retail after Allocation – 3.61 times, Non-Retail above Rs. 5 Lacs – 0.68 times
Listing likely to happen between July 18th & July 20th
Thank you Shiv!
What is the difference between Retail up to 5 lacs and Retail after allocation? Thanks!
Hi Manshu.. Honestly speaking even I didn’t know whats the difference was till the time you asked me this thing.. But when something had been asked I was required to find it out.. so what I’m able to find out is this:
(Note: Issue Size – Rs. 500 Crores & Green-Shoe Option – Rs. 500 Crores)
Category >> Max % Allotment >> Subscription >> Subscription in Rs. >> Actual Allotment
QIB >> 10% of Rs. 500 Crs. >> 1.1 times of Rs. 50 Crs. >> 55 Crs. >> 50 Crs.
Corporates >> 10% of Rs. 500 Crs. >> 0.56 times of Rs. 50 Crs. >> 28 Crs. >> 28 Crs.
HNIs >> 40% of Rs. 1000 Crs. >> 0.68 times of Rs. 400 Crs. >> 272 Crs. >> 200 Crs.
Retail >> Remainder of Rs. 1000 Crs. >> 5.44 times of Rs. 400 Crs. >> 2176 Crs. >> 722 Crs.
So Retail upto Rs. 5 Lacs – 5.44 times of Rs. 400 Crs. is Rs. 2176 Crores
& Retail after Allocation – 3.61 times of Rs. 200 Crs. is Rs. 722 Crores
(Note: I might be wrong here in my analysis as the figures are still source based & the company is yet to announce something publicly)
Thanks for spending the time on this, let’s hope to see the official release soon, and get confirmation on your theory.
Wasn’t it supposed to close on July 9 ?
Shriram Board had the option of early closure of the NCD Issue in case of over-subscription, which they exercised yesterday.
Hi,
Just to update you guys that NCD issue is closed for subscription on day 1 itself.
Incredible! Looks like the gray market is in full swing here!
@manshu appreciate your response.
So you are saying it will be clubbed as other income and normal tax rates will be applicable.
Also are you suggesting annually interest will be credited to the linked savings account.
Hi Vivek – Yeah, interest will be added to your income and be taxed. It will be credited annually with whatever option you choose, savings bank, mail a check or whatever other options they have going.
Nice article.
One question
Is interest income taxable every year on this bonds or capital gain taxable at the time of maturity
Thanks Vivek.
Since interest payment is annual, it will be taxable every year. At the time of redemption you will not have to pay any capital gains since the bonds will be redeemed at the face value.
why does subramoney not rate this issue very high? He says invest in sbi bonds which are already listed?
should one invest in Shriram transport finance or ignore this issue?
Economic Times had reported on June 23:
“Though NCDs are listed on the stock exchange, hardly any trading takes place. Some earlier NCD issues of Shriram Transport (Series NF and Series NG) are available in the secondary market, with a yield ranging between 12% to 12.8%, which is slightly higher than the current yield.”
So, why not buy from the secondary market? and how to buy online from secondary market? please advise.
The article says that it is not liquid which means it’s not very easily bought or sold, so that’s one reason to directly get it. Secondly, you might not get it at the face value from the secondary market. It may be selling at a premium and you have to pay a little extra to buy them Manish.
I have send link of your article to my clients and hopefully they will take good decision based on your review.
Thanks Paresh! Just curious to know what questions your clients have about these kind of NCDs. I may be able to write some articles around their questions. Thanks!
Dear Manshu,
In fact peoples do not understand how NCDs works?How they differ from fixed deposits? If it is secure then why there are so much risk factors in offer document and so on….
Also,,Whenever a new product comes and If i do not have much understanding about it I used to send peoples different views which I find useful so that they can take investment decisions of their own.
Dear Paresh,
Thanks for your comment. It’s great that you point out different perspectives to your clients and help them take a decision. I will try to write about some of these topics in a post and try to answer some questions.
First of all, I should thank you for such a kind of helpful articles about Capital markets. Your articles are easy to understand and really helping a person from the non-finance background as like me.
Indiabulls also announced the online application for this NCD bond and I’m planning to invest only a very small amount to not to take more risk. What your thoughts?
Thank you Vimal!
I think as long as you’re diversified and don’t put too much eggs in the same basket you should be fine.
Hi
I think these bonds (SBI 9.95%, IFCI 10.75%, Shriram 11.60% etc.) score reasonably high over Bank/Company FDs as there are many features in favor of these bonds like Higher Interest Rates, No TDS, Easy Liquidity through Listing on BSE/NSE, scope of Listing Gains, scope of Capital Appreciation, No Penalty on Pre-Mature Withdrawal etc.
Also provision of Online Investment facility provided by various broking houses like ICICI Direct, Edelweiss Broking, Sharekhan etc. has given quite a big relief to the investors who dont easily get services from brokers or distributors.
To invest in Shriram Transport Finance 11.60% NCDs or for any other info Contact us at 9811797407 (For Delhi, Gurgaon & Noida).
Hello Manshu,
As usual a well-balanced article.
I am planning to give STFC bond issue a miss, as I already substantially invested in their 2008 issue and, as you correctly put it, don’t want to put all the eggs in the same basket.
I can’t understand why mutual funds don’t bring out FMPs with longer tenures. With the high interest rate regime now, that would have been a good option to lock in for a long period. (Perhaps, there aren’t enough long term corporate bond issues ?)
Lakshmi Vilas Bank (LVB) is offering Interest at 10.75 % quarterly compounding for a TWO years’ term for Senior Citizens. Effective rate of Interest p.a. works out to 11.19 %. When we compare this with 11.35 % Interest rate p.a. offered by Shriram Transport Finance for NCDs of THREE years’ term, the difference amount involved is only Rs 160 for one year on an investment of Rs 100,000.
Karur Vysya Bank (KVB) is offering Interest at 10.50 % quarterly compounding for a TWO years’ term for Senior Citizens. Effective rate of Interest p.a. works out to 10.92 %. When we compare this with 11.35 % Interest rate p.a. offered by Shriram Transport Finance for NCDs of THREE years’ term, the difference amount involved is only Rs 430 for one year on an investment of Rs 100,000.
It appears to me that above differences of Rs 160 (LVB) and Rs 430 (KVB) for one year period on an investment of Rs 100,000 is not significant enough for parking our funds in NCDs from security and liquidity (availability of overdraft facilities to bank upon in case of emergencies) point of view
Thank you for your comment Mr. Rao, I guess senior citizens, who want to open a FD in these banks and don’t mind the shorter duration are better off with the banks. But it really depends from individual to individual in my opinion.
Dear All,
I have enquired just few days back that Union Bank of Indi is offering a FD in which your money gets doubled in seven and a half years. I have not checked but they say the interest rate is 9.40 % compound and the yield sets to something more than 14 % prior to tax.
So, safety of a natianalised bank and as you say high interest rate for a longer period.
Alpesh, that means they are offering a FD for 9.40% per year probably compounded quarterly or something. In order to compare this with another product you can simply look at what is the per year rate of interest they offer.
Here is an article about it, I’d say you’re better off ignoring yields and focusing on yearly interest rate:
http://www.onemint.com/2011/06/15/dont-confuse-yields-with-interest-rates/
But what I think,,one can improve the yield by reinvesting the yearly interest received at some proper place.
Yes, absolutely, and that should be a key thing to think about. Where can you invest the money to earn a reasonable rate of return without much risk. My observation is only with respect to comparing a yield with an annual interest rate.
Hi Mansu,
First time reader of the blog, but must say I really liked you style of writing..
Simple and precise – exactly what I was looking for.
Thanks and keep up he good work!
~Madhab
Thanks Madhab,
Stick around and you’ll notice that there are a lot of smart readers here as well. The comment section has a wealth of information, and is sometimes better than the post itself 🙂
Thanks and hope to see you here in the future as well!
hi Manshu,
can you throw some light on when the interest rates goes up the coupon value will be less than the face value ? also i read somewhere that when an New offer on a bond is issued there are traders in the market but after some time say like 3 yrs or so , its very difficult to find buyers esp when the coupon value is traded at less value to the face value, and also advise that in such a case wud an investor be better off in holding it to maturity ? and will the implication of tax be covered at the end of 5 yrs ? will it be indexed ?
regards
Sorabh
Hi Sorabh,
So think of a situation where these bonds are listed and are trading at say par value. Now imagine, interest rates go through the roof and hit 25%. If STFC comes back with a fresh issue in this case with a rate of interest that’s 25% – think of what will happen to the price of bonds that pay only 11.35%. They are nearly not as valuable enough as they used to be now because with the same Rs. 1,000 you can generate 25% interest. That’s what I meant.
The bond market is still developing in India, and I don’t think we have enough history to say that after a few years the bond will not have enough demand. This market is still developing, and we’ll have to wait a few years before making generic statements like that. That’s my opinion anyway.
But, yeah, if for whatever reason you’re bond is trading for less than its face value then better hold it till maturity.
Yes, it will be indexed if your bonds have not been redeemed at face value (you chose the cumulative option at the beginning)
Hope this answers your questions!
Hi Manshu…
Many thanks for this one!! I was about to ask for a review of this NCD. I skipped IFCI and planning to invest in this one.
How do you think one should go about it in terms of application money as this can be oversubscribed as well and the prospectus says its on first come first server basis?
Hi Mithlesh, how are you doing?
Yeah, they talk about doing this first come first serve & they’ll use the date on the bank receipt. So, looks like anyone interested should use the offline method rather than wait for their brokers to facilitate this online.
That was a great point you brought up – thank you!
Manshu,
FYI: I received a mail from ICICI Direct regarding this today. They’ve enabled online application for Shriram’s NCD
Thanks Krish – That’s great for people interested in this. In general, my feeling is that ICICI Direct is the first one to get most bond offers online, and other companies do it later. Do you have any thoughts on that? Thanks!
Thanks Manshu!! I am doing fine…I may apply for this issue as the minimum amount is lesser company is well known and looks stable to me( i have stocks as well of STFC which has given me exemplary returns so far :)- ) . There is no doubt about this company as it is one of best NBFCs at the moment.
Also muthoot finance and manappuram general finance are also likely to come up with NCDs in the next few weeks. Its raining bonds and NCDs :)- One should take advantage of these issues in these uncertain times.
Thanks for the article.
Can you explain what is meant by ‘secured’ here, and how does that ‘lend them additional safety’.
Btw, the TamilNadu Mercantile bank is offering 10% on FDs for the 5-10 year period, so that seems to be another decent option for locking in long-term rates. Saw this in a newspaper, no idea on how stable this bank is.
Hi Ayush,
Thanks for mentioning Tamil Nadu Mercantile Bank, I’ll try to look that up, but from experience know that not a lot of people are interested in opening a FD there (for whatever reasons).
To your question, when a company issues debt – it’s either secured or unsecured. Secured means they have some assets that cover the debt, and in case of default the creditors can sell those assets and recover the money.
Unsecured means that there are no assets earmarked to cover the debt, and only after everyone else is paid off, do the unsecured creditors get paid.
Can you plz elaborate on why people may not be interested in opening FD with TMB?
I had mentioned the rates offered while discussion on Muthoot NCD/IFCI. I was in fact considering opening FD for longer duration with TMB.
Plz let me know what could be possible reasons to not go with it?
Things like a smaller network, not being sure of customer service, having to open another account, general perception of this being a lesser known and much smaller bank. These kind of soft factors if I may call them that.
Now, my experience can be biased by talking to people mostly in Delhi.
You have been honest in providing all the details of Shriram Transport Finance Ltd. NCD’s .
Frequent borrowing from the market do send an alarm, at the same time middle class is left with little choice. The only caution that we can take is not to put all eggs in one basket as you have advised. Things can go wrong anywhere anytime. Many times the information is also concealed to build investor confidence.
Thanks Manohar! Your comment is very timely for me. A few hours ago, someone commented on a gold post insinuating I was deliberately holding back information, and didn’t want to share the right info.
Made me wonder what I’m doing wrong to make someone think I’m trying to deceive people. It makes no diff to me whether someone buys a gold coin or an ETF – I don’t stand to gain either way do I?
So, thank you very much for your comment!
I think what manoharkantak meant is — Many times the information is also concealed “by bond issuing companies” to build investor confidence.
Yes, Sanjay – that’s what I interpreted it to be.
When I mentioned about what made some people think that I’m trying to deceive people that was with reference to another comment that someone else made, not Manohar.