Shriram Transport Finance NCD Review

by Manshu on June 22, 2011

in Fixed Deposits

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!

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