Introduction to NCDs – Part II

by Manshu on August 28, 2011

in Fixed Deposits

I wrote Introduction to NCDs – Part 1 some time ago, and in that post I covered basic aspects about them. Then I wrote about how you could buy NCDs or bonds, and in this post I am going to look at some other questions that have cropped up about them since that time.

In a subsequent post I will address some more questions about listing, and yields etc. but this post will address some points which are slightly less complex than those ones.

 

How are NCDs taxed?

NCDs can earn you income in two ways – you can buy the series which promise an interest payment periodically, or you can buy the series that doesn’t pay you any interest but pays you a higher lump – sum amount at maturity.

Both these types are taxable.

If you buy a NCD that pays interest then the interest will not attract TDS, however you will have to add the interest to your other income and pay tax on it according to your income tax slab.

If you buy a NCD that pays a higher amount on maturity then that will attract capital gains tax, and you will have to pay capital gains tax on the money when you eventually receive it.

Are all NCDs allotted first – come first serve and why does this make a difference?

The listing gains game has started on NCDs the way it started on IPOs a few years ago, and as a result retail investors have found that they aren’t able to get full allocation on the NCDs that they apply for.

Every company that has come out in the recent past has allotted bonds on the first come first serve basis, and I think that will continue to happen in the future as well.

What this means is that if you plan to buy a NCD then you must do it on the first day itself. That will ensure that you get as much allotment as possible, and your money isn’t stuck with them for long for no reason.

Where can I get real time over subscription numbers of NCDs?

Since over subscription is happening right now, and it makes a difference on when you apply – it would be nice to be able to see how much a NCD is oversubscribed at any point of time.

However, currently, this data is not shown anywhere publicly. Even though these bonds list on NSE and BSE, they don’t display the over subscription numbers on those websites.

I think the first come first serve basis allotment, and the over subscription data not being displayed anywhere situation will change with time, but so far that hasn’t happened.

How do I judge the relative attractiveness of two or more different NCDs?

There is a lot of subjective judgment involved when it comes to this question. You can straight away compare the rate of interest between two NCDs, but it is rather difficult to compare the quality of issuers especially when both of them are lesser known.

Considering whether the issue is secured or unsecured is one parameter that you can use. The additional debt that the current issue will add to the books is another issue that you can consider.

The business of the company is another thing of course. Who does it lend to, what collateral it takes, and how good is the mix on its loan book.

But perhaps the most important thing to consider is how much additional interest this NCD is giving over other prominent NCDs like the SBI one.

If that is just a percentage point or so then there is a good chance that may mean that this NCD trades at a discount when the interest rates rise in the future.

All these factors may sounds like a bit too complicated to figure out, but NCDs are reasonably popular these days, and most news articles do cover all this information in some detail. If you read a three or four articles about an issue you will gain a good bit of knowledge about these factors.

Also, the credit rating of an issue tells you what the issuer think about them, and they have a brief summary on their rationale that you can read as well.

Summary

To summarize this post – NCDs are taxable – no matter what option you choose, so far they are allotted first come first serve, and that makes a difference because the current issues are being over subscribed. If you decide to invest, then do so at an early stage.

This is counter to applying for share IPOs because they don’t use the first come first serve method and also show the over subscription online.

And finally, judging the relative attractiveness of two issues is subjective but factors such as credit ratings, issue size, loan book mix etc. can help you in judging that.

 

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