Tranche 1 of 7.15% Power Finance Corporation NCD Bonds 2021 is available for subscription from 15th January 2021 to 29th January 2021. Should you invest in this NCD or who can buy such NCDs?

About Power Finance Corporation

Power Finance Corporation is a public sector company and specialised financial institution in power sector. With 20% market share, it is designated as nodal agency for development of Integrated power development scheme, ultra mega power projects etc.,

PFC is under the administrative control of the Ministry of Power. PFC was conferred the title of a ‘Navratna CPSE’ in June,2007, and was classified as an Infrastructure Finance Company by the RBI on 28th July,2010.

It is a biggest NBFC in India by its net worth (all reserves). Also, it is a ISO 9001:2015 certified company with consistent profit making company, strong asset quality and designated as a “Nodal Agency” for development of Integrated Power Development Scheme(IPDS), Ultra Mega Power Projects (UMPPs) and “Bid Process Coordinator” for Independent Transmission Projects (ITPs).

Before jumping into investment, first let us udnerstand what are NCDs or Debentures and how they are differ from the typical Bank FDs.

What are debentures?

Debentures are nothing but you are lending the money to the company. In return, the company is promising you the interest rate and return of principal at the specified time period. Then what is the difference between debentures and bonds?

In the case of India, the difference between bonds and debentures are same. However, there are slight differences only the reasons for which companies borrow money from us (investors). Usually, bonds are meant for long-term company’s borrowing. However, debentures are meant for meeting short-term company’s requirement.

Types of Debentures

Let us now understand the different variants of debentures.

Convertible and Non-Convertible Debentures

Convertible debentures mean after the specified time, these debentures are converted into shares (stocks) of the company. Up to that conversation, you will enjoy the fixed specified coupon (interest rate) on such debentures. After that, your earnings depends on price appreciation of the stock or the dividend income you receive (if the company declares it).

Non-Convertible Debentures, on the other hands, will never be converted into shares (stocks) of the company. Investors who invest in such non-convertible debentures will enjoy fixed interest rate up to maturity and after that return of principal (exactly like Bank FDs).

Secured and Unsecured Debentures

Now within debentures, there is one category like secured and unsecured debentures. Secured debentures mean companies while borrowing money from you usually along with a promise to repay the interest and principal timely, put up some asset (such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders) as surety for the loan.

Secured means in case of the company goes bankrupt or goes something wrong, the company will sell such asset and repay you the money. Hence, secured debentures are usually safer than unsecured.

In case unsecured debentures, if the company goes bankrupt, then you will get the money when all such secured debtors amount is paid back. Hence, unsecured debentures are risky than secured and also because of such risk they offer a higher interest rate to you than the secured.

Call and Put Option in Debentures

There are one more variants in case of debentures and they are usually called as Call or Put Option Debentures.

A CALL option means the company has an option to ask the investor to surrender the debenture after a certain period to them. In such a situation, the company will pay back the principal to you.

Usually, companies exercise this option if interest rates go down, and the company can get funds at lower rates from the market. In such a situation, instead of paying you a higher interest rate, companies can exercise this call option and go for a cheaper loan.

On the other hand, a PUT option means that the investor has an option to surrender the debenture if he wants to, and get back his principal.

Suppose if interest rates go up and what you are receiving from your debenture is offering you lesser interest, then you can exercise this option and get back your money to invest somewhere else. A put option gives a lot of flexibility to the investor – if interest rates go up, and he can get better rates from the market.

Do remember that such CALL and PUT options are available to investors after holding the debentures for certain periods. Also, companies give you a time period to accept or exercise such options and within that period you have to exercise it.

Taxation of NCD (Non-Convertible Debentures)

# Interest Income

The taxability of interest on NCD will depend on the method of accounting you follow for recognizing your income.

If you are following the cash method of accounting, interest will be taxable as and when the interest is received.

However, under the mercantile method of accounting, interest income on NCD will be taxable as and when interest is accrued and due.

Hence, interest income is treated as “Income from Other Sources” and treated accordingly.

# Short Term Capital Gain

If you held the debentures for less than a year and sold it in the secondary market, then any such gain from this selling will be taxed according to your tax slab.

# Long Term Capital Gain

If you hold the listed NCD, (cumulative or annual interest payment), for a period of one year or more, and on selling such NCD if you earn the gain, then such gain will be long-term capital gains (LTCG) chargeable to tax at 10% without indexation benefit.

NCD (Non-Convertible Debentures) – Who can invest?

Many of us blindly invest with the lure of high returns from such debentures. As I told you earlier, currently few NCDs are offering you high-interest rate than banks.

Advantages of NCD (Non-Convertible Debentures)

  • These are good if you are looking for a constant stream of income. Do remember that few NCDs offer you to return interest and principal at maturity itself. Hence, in such a situation, they act like typical FDs for you.
  • Usually offers higher interest rates than the Bank FDs.
  • These NCDs are listed in stock exchanges. Hence, in the case of liquidity, you can sell it in the secondary market.
  • Interest will be directly credited to your bank account. Hence, the ease of managing money.
  • There will not be TDS (Tax Deducted at Source) for these NCDs if you held them in Demat format. Hence, in this feature, they have an edge over Bank FDs.
  • It will give you diversification to your debt portfolio.

Disadvantages of NCD (Non-Convertible Debentures)

  • Credit Rating-Never trust the current credit rating and jump into investing. Credit rating may change at any point of time based on the company’s financials. Hence, beware of credit rating.
  • Liquidity-Even though such NCDs are listed in the secondary market (like BSE or NSE), they are very thinly traded. Hence, you may face the liquidity issue.
  • Post Tax Returns-Always check for post-tax returns on the interest you will receive. The formula to calculate the same is given below. Hence, a 9% NCD may not be the same for 10%, 20% or 30% tax slab individuals.

Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }

  • Why a company needs the money-Check why they need the money? Why they are offering you higher interest rates than Bank FDs. If it is not possible to gauge the same by you, then knock the experts’ door and then only invest.
  • HIGH RETURNS MEANS HIGH RISK-As I said above, if they are offering you the highest interest rate than Bank FDs, then there is always a risk involved. Mere SECURED DEBENTURES means not fully secure that you will get the money the next day after the company goes bankrupt.
  • Check Financial Statement-Check financial statement of the company for the like how much % of their total asset the company allocating for unsecured loans, Capital Adequacy Ratio (CAR), how much % of their total asset is set aside for the NPAs (non-performing assets) and like interest coverage ratio.

Tranche 1 7.15% Power Finance Corporation NCD Bonds 2021 – Features

Power Finance Corporation is issuing secured redeemable Non Convertible Debentures (NCD’s) in the January Tranche-I issue to the tune of Rs 500 Crores, with an option to retain another Rs 4,500 Crores towards over subscription, totaling to Rs 5,000 Crores. It comes with 7 different options with 3 years, 5 years, 10 years and 15 years tenure.

  • NCD issue date is 15th January 2021 to 29th January 2021.
  • This NCD is available in 7 different options.
  • Interest on this NCD is either payable on a quarterly basis or annually.
  • The face value of each NCD is Rs.1,000.
  • Minimum investment is Rs.10,000. It means at least you have to buy 10 NCDs.
  • This NCD will be listed on BSE for liquidity purposes.
  • The current credit rating from CARE/Crisil/ICRA is AAA. It means stable, which indicates that instruments with this rating are considered to have a high degree of safety regarding timely servicing of financial obligations and carry a low credit risk.
  • You can apply for these bonds using your Demat account. As the physical submission is not allowed.

The coupon rates and option details are as below:-

Tranche 1 7.15% Power Finance Corporation NCD Bonds 2021

Floating Rate Power Finance Corporation NCD Bonds 2021

Interstingly, Power Finance Corporation NCD Bonds 2021 is offering you the FLOATING RATE NCD which is unique in my view.

Floating rate in the sense, interest rate will flactuate as per the 10 years Government Of India Bond benchmark. The GOI 10 Years benchmark the NCD is following is Benchmark FIMMDA 10Yr G-Sec. The NCD offers additioanl returns of 0.55% 0.8% higher returns to Category 1 to 2 and 3rd to 4th types of investors respectively.

I think PFC instroduced this feature to compete with RBI Floating Rate Bonds (Government of India Floating Rate Savings Bonds, 2020 (Taxable) – Should you invest?).

Tranche 1 7.15% Power Finance Corporation NCD Bonds 2021 – Should you invest?

I have already covered the full part of who can consider such NCDs. However, considering the recent frequent change in Credit Ratings of the companies by these credit companies, it is hard to believe and invest blindly. Hence, I thought to add few more points here.

But safety-wise, as it is a PSU company, I don’t think it is wise to compare the other private sector companies with this company. However, you have to understand few points before you jump into investing.

# NCDs are not like Bank FDs

Do remember one thing that NCDs are not like typical Bank FDs, where you invest now and regularly receive the monthly or yearly interest payment and at the end, you get the principal.

The risk is more in case of NCDs even though they claim to be secured.  Hence, your return of principal and interest depends on the company’s financials. Hence, never compare your Bank FDs with NCDs.

# Repeating again…Credit Rating may change at any time

Take the case of IL&FS issue. It was highly rated and suddenly downgraded within a few months. What will happen to investors don’t know. Even though IL&FS issued secured NCDs, the possibility is high that you may get interested and principal after the deadlines.

Hence, never ever trust the credit ratings and invest.

# Take a calculated RISK

Take the calculated risk. How? Invest around 10% of your debt portfolio into such NCDs. Never invest all your debt portfolio under single NCD. Assume your corpus is around Rs.5 Cr and you are completely relying on this corpus to survive monthly, then not invest more than 10% such corpus in NCDs and that also never in a single NCD.

# Company’s Financials may change without our notice

Even if we believe credit rating remained the same, but it is hard for retail investors to follow company financials regularly. Hence, without our notice, there may be a change in financial situations or NPAs. Hence, diversify your risk in different NCDs rather than sticking all money in a single issue.

Check cautiously about the company financials also. Better to track of past history of around at least 5 years. Also, check the management values and who is managing the company.

# Falling itnerest rate

Considering the falling interest rate, I think safety-wise it is the best option for senior citizens to park their some portion of retirement corpus. I think this is far better than RBI Floating Rate Bonds.

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