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Tata Capital Debenture Issue – A review

Recently, Tata Capital has come up with a secured, non-convertible debenture issue.

What are the features? Should you invest in it? Is it right for you? How does it compare with a bank fixed deposit (FD)? What about Tata Capital debenture vs a company FD?

Let’s find out.



Tata Capital has come up with a secured, non-convertible debenture issue that is open from February 2 to February 24th.

Let’s understand the features of the Tata Capital debenture issue.

(To know more about debentures and understand their features, please read “Understanding a Debenture“)


Update: How to check the latest price of the Tata Capital NCD (after listing on the stock exchanges)

  • Go to NSE website: www.nseindia.com
  • On the right side, in the “get quote” box, enter “TATACAP”.
  • In the drop down (where `EQ` is displayed by default), select:
    • N1 to see the price of the monthly interest option
    • N2 to see the price of the quarterly interest option
    • N3 to see the price of the annual interest option
    • N4 to see the price of the cumulative interest option
  • Press the “Go” button to see the latest price.

Secured

The debentures are “secure”, meaning that the amount Tata Capital accepts from you is tied to (or backed by) some assets of the company.

This makes them better than company FDs (and even bank FDs) in terms of their risk profile.


Non-Convertible

The Tata Capital debentures are non-convertible.

This means that the debentures are more like traditional fixed deposits. You can not convert them into shares of Tata Capital at a later date – you get back the principal amount at the time of maturity.

This is not a bad thing – a “convertible” option just makes a debenture more attractive!

Credit Rating

This issue has been rated “LAA+” by ICRA, which means “high credit quality and low credit risk”.

It has been rated “AA+” by CARE, meaning “high safety for timely servicing of debt obligations”.

These indicate that the issue is quite safe.

Tenure / Redemption

The tenor of the debentures is 5 years – the debentures would be redeemed 5 years after the date of allotment – if the put or call option is not exercised.

Put and Call Options

The Tata Capital debentures have both put and call options.

This means that you have an option to surrender the debenture before its maturity (after the pre-specified period) if you want to. Similarly, the company can ask you to surrender the debenture before its maturity (after the pre-specified period).

This means that both you and the company have flexibility!


Income Tax Treatment

The interest earned would be treated as any other interest (say, from a bank FD). It would be a part of your “Income from other sources”, and would be taxable. However, there would be no TDS (Tax Deducted at Source).

A debenture is a capital asset. If you sell the debenture on the stock exchange before holding it for a year, it would be a short term capital gain (STCG) – it would be included in your income and would be taxed as per prevailing IT slabs.

(To know the currently applicable slabs, please read “Income Tax (IT) Slabs / Brackets – FY 2008-09 AY 2009-10”)

If you sell it on an exchange after holding it for a year or more, the gain would be long term capital gain. This LTCG should be calculated without indexation, and would be taxed at 10% of the gain.

(To know more about classification & taxation of capital gains and indexation, please read “Long Term and Short Term Capital Gain – Income Tax Calculation”)

Listing on stock exchange

Tata Capital debentures would be listed on the National Stock Exchange (NSE).

Options and Minimum Investment Amount

There are four options available to you, the major difference being the interest payment frequency. You can choose to receive the interest monthly, quarterly, annually, or the interest can be cumulative.

Depending on the option you choose, the minimum application amount varies (it is either Rs. 10,000 or Rs. 1,00,000).

Also, the time when the put and call options can be exercised also depends on the option you choose (it can be either after 36 months or after 42 months)


Rate of return

The interest rate offered (or the coupon rate) varies from 11% per year to 12% per year, and again depends on the option you choose.

The effective yield (considering the interest payment frequency) ranges from 11.57% to 12% per annum.

Holding the debentures

The debentures would be issued only in dematerialized (demat) form. Thus, if you do not have a demat account, you would not be able to apply for these.

Who can apply?

Both individuals and Hindu Undivided Families (HUFs) can apply for these debentures.

Please note that Non Resident Indians (NRIs) and foreign nationals can not apply.

Summary of the Tata Capital Debenture Issue

Here is a summary of the features of the issue:

Options I II III IV
Interest Payment Monthly Quarterly Annual Cumulative
Minimum Application Amount Rs. 1,00,000 Rs. 10,000 Rs. 10,000 Rs. 10,000
Additional Application Amount in Multiples of Rs. 1,00,000 Rs. 1,000 Rs. 1,000 Rs. 1,000
Face Value of Each Debenture Rs. 1,00,000 Rs. 1,000 Rs. 1,000 Rs. 1,000
Interest Rate / Coupon (per annum) 11.00% 11.25% 12.00% 12.00% (compounded annually)
Put and Call Options Exercisable at 36 months 42 months 36 months 36 months
Tenor / Duration 60 months 60 months 60 months 60 months

Analysis

Safety: Usually, corporate debt is considered riskier than bank FDs. However, since these are “secure” debentures, they should be considered as safe as bank FDs, if not more.

Also, they are backed by the Tata name, which has been a very dependable group for decades.

Returns: The interest rate offered is quite good, and even the post tax return would be much higher than the prevailing interest rates on bank FDs and other fixed interest instruments.

Lock-in: The debentures have a lock-in of 5 years. This means that you can be assured of this good return for 5 years.

However, there is a put / call option exercisable at 36th / 42nd month. But even then, your returns are locked in for at least 36 / 42 months. In a falling interest rate scenario like today’s, locking into a good interest rate is a big positive.

Conclusion – Should you invest?

These debentures offer good rate of return with a very low risk. If you do not invest in equities for long term and depend more on fixed income / debt instruments, the Tata Capital debentures can be a very good option for you.

In fact, these are better than bank FDs or company FDs in terms of their risk-return profile.

Issue Prospectus

Download the Tata Capital Debenture issue prospectus

Application form

The application form for the Tata Capital Debenture issue can be obtained from your broker.

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