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Understanding Taxes

India Infoline Public Issue of Non Convertible Debentures (NCD)

For all those investors who desire a low risk investment option with decent returns, here is a NCD issue available in the market. India Infoline Investment Services Ltd. is out with its public issue of Non convertible Debentures (NCD) to the tune of Rs. 750 crores.

 

Overview of the Company

image India Infoline Services Limited is a Non Banking Financial Company (NBFC) and a wholly owned subsidiary of India Infoline Limited. The company deals in equity broking, investments and third party products distribution and financing. In order to meet the working capital needs, the company is offering Secured Non-Convertible Redeemable Debentures.

  

What are Non Convertible Debentures?

A Non Convertible Debenture (NCD in short) is a low to moderate risk debt instrument issued by companies, for a fixed maturity period at a fixed rate of interest. NCDs cannot be converted into equity of the issuing company unlike convertible debentures which can be converted into equity of the issuing company at a future date.

  

Debentures versus Bonds

Technically speaking, bonds and debentures don’t have much of a difference. Fixed income instrument issued by the Government and Government run institutions are known as bonds. The ones issued by companies are called debentures.

  

Debentures versus Fixed Deposits

Fixed deposits, whether company or bank, are non-transferable and thus not influenced by changes in interest rates. They cannot be sold unlike NCDs which could be listed on a stock exchange and thus be sold. Where NCDs can be secured, corporate FDs are unsecured and bank FDs are secured up to Rs. 1Lakh.

  

Key Features and Benefits of NCD

Issuance and trading: NCDs are issued and traded in demat form.

Returns: NCDs are ideal for conservative investors who seek higher returns but are risk averse. Returns are generally in the range of 11 to 12%, depending upon the company.

  

Safety: NCDs are relatively safer than company FDs. They possess low to moderate amounts of risk depending upon the company. NCDs could be secured or unsecured. Secured NCDs are secured against the assets of the company. In other words, in case of a default, these investors will be paid back first, by selling some of the assets of the company. In case of unsecured NCDs, there is no security for repayment of principal or interest.

  

Liquidity: Investors could liquidate NCDs by either selling it on the stock exchange or by exercising the Call or Put Option.

Tax Implication: There is no Tax Deducted at Source (TDS) on NCD investments. However for NRI investors, there is a TDS deduction. The interest income of an NCD is taxed at normal rates and is included under Income from other sources. They are also subject to capital gains tax when sold at the stock exchange.

  

The India Infoline NCD Public Issue

Issue open date: August 4, 2011

Issue close date: August 12, 2011

Credit Rating

The company has a rating CARE AA-' by CARE & ‘ICRA AA-’ by ICRA, indicating a stable outlook.

Listing

NCD will be listed on both the NSE and BSE.

  

Eligible Investors

Investors have been divided into three categories

  

Category I- Public Financial Institutions, Statutory Corporations, Commercial Banks, Co-operative Banks, Regional Rural Banks, Provident Funds, Pension Funds, Superannuation Funds and Gratuity Funds, which are authorized to invest in the NCDs, Venture Capital funds registered with SEBI, Insurance Companies registered with the IRDA, National Investment Fund, and Mutual Funds.

 

Category II- Companies, corporate bodies, societies, public/private charitable/religious trusts, scientific and/or industrial research organizations, which are authorized to invest in the NCDs, partnership firms in the name of the partners, Limited liability partnerships formed and registered under the provisions of the Limited Liability Partnership Act, 2008

 

Category III- Resident Indian individuals and Hindu Undivided Families.

Category III applicants, applying for NCDs aggregating to a value not more than Rs. 0.5 Million, across all series of NCDs, (Option I and/or Option II and/or Option III), shall be grouped together as Reserved Individual Portion.

Those who apply for NCDs aggregating to a value exceeding Rs. 0.5 Million, across all series of NCDs, (Option I and/or Option II and/or Option III), shall be separately grouped together as Unreserved Individual Portion.

 

Issue at a Glance

IIFL NCD

  

So Should You Invest in This Issue?

The yields offered in the issue are of course quite attractive, in comparison to other debt instruments. Though it has a stable credit rating, it pays to tread carefully. India Infoline is relatively new, with business in financing home loans, loan against property etc… and with the current volatile market, NBFCs constantly face default risks. Considering all of the above points, plus the fact that the issue is a secured one, the NCD is advisable for those investors who are willing to earn a higher rate of interest and willing to take a moderate amount of risk. Also remember, NCDs don’t come with any tax benefit. So if you are looking for tax saving options, this is not the one for you.

            

Written by Ramya Ramachandran

Published Aug 05 2011




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