Edelweiss NCD offers interest rate up to 9.7%. Should you invest?

Edelweiss Financial Services Limited (EFSL) has announced the public issue of secured redeemable Non-Convertible Debentures (NCDs) with an effective annual yield ranging from 9.09% to 9.70%. If you already have an NCD issued by EFSL or group companies, then an additional incentive maximum of 0.20% p.a. will be offered. There are eight series of NCDs carrying fixed coupons having tenure of 36 months, 60 months and 120 months with annual, monthly and cumulative interest options. The issue opens on August 17, 2021, and closes on September 6, 2021.

Important info for investors

NCDs are debentures that 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.

The face value of EFSL’s NCD is Rs 1,000 each, amounting to Rs 2,000 million, with an option to retain over-subscription up to Rs 2,000 million aggregating to a total of Rs 4,000 million.

Funds deployment

At least 75% of the funds raised through this issue will be used for the purpose of repayment or prepayment of interest and principal of existing borrowings of the company while the remaining amount will be deployed for general corporate purposes.

Credit rating

The issue has been rated “Acuite AA (Outlook: Negative)” by Acuite Ratings and Research Limited and “[ICRA]A+ (Negative)” by ICRA Limited. Equirus Capital Private Limited is the lead manager of this NCD issue. Given the rating, one should be very careful in allocating any large sums into such NCDs.

Liquidity

The NCDs will be listed on BSE for providing liquidity options to the investors. Though they are tradeable on BSE, generally NCDs are low on liquidity score. FDs have much higher liquidity compared to NCDs.

Taxability

Interest income on NCDs is taxable just like fixed deposits. However, if not kept till maturity and sold within one year then short term capital gain tax is levied. Short term capital gain is taxed according to the tax slab you fall into. If sold after a year, 10 % long term capital gain tax is levied without indexation. So these are not tax-efficient unless someone sells in the market after one year.

What should investors do?

The NCD can be compared with credit risk mutual funds, which invests in low-credit quality debt securities. It is better to diversify this credit risk through a mutual fund where the fund manager actively handles the portfolio. Moreover, it is not very lucrative for high tax bracket investors, as it will offer around 6.35% to 6.8% post-tax, assuming a 30% tax bracket. For small investors, one should be very careful about their allocation into the high-risk investments.