Tata Capital NCD: Should you invest?

GIVEN the continuing downturn in the economy on the back of what is gradually transpiring into a worldwide recession, safety of capital has become of paramount importance. However, the government on it's part, in a bid to encourage growth, has been releasing massive amounts of liquidity in the economy through its monetary policy. This has resulted in the returns on popular fixed income investments like bank FDs etc steadily dwindling.

In such a scenario, Tata Capital Ltd.’s Non Convertible Debenture (NCD) issue that offers an effective rate of return between 11.5 to 12 per cent pa (depending upon the option chosen) is a very attractive opportunity for investors seeking regular income along with safety.

About the issue

- The issue is open from February 2 to February 24, 2009.

- The issue is open only to resident Indians and NRIs cannot apply.

- These NCDs are issued in demat form only, so you need to have an active demat account.

- The minimum amount that you can invest is Rs 1 lakh in the case of monthly interest option and for the remaining it is Rs 10,000.

- There will be no tax deduction at source (TDS) on the interest earned.

- The debentures are offered in four options: monthly, quarterly, annual and cumulative interest

The rate of return and other features of the issue are detailed in the table below.

Is there a lock-in?

Though the NCDs have a tenure of five years, they do have a liquidity feature in terms of a put and call option as pointed out in the table. (‘Put’ refers to the right of the investor for early redemption whereas ‘call’ refers to the right of the company to call for premature redemption).

The instruments can also be traded on the exchange and the market price would be the cum-interest price as on the date when you sell it.

Taxation

The interest will be taxable in the usual course. That is, the interest that you receive monthly, quarterly or cumulatively on maturity will be taxed as other income, that is, added to your total income and taxed thereof.

If you decide to sell at the stock exchange, it will be treated as a long-term capital asset if held for more than 12 months immediately preceding the date of sale.

The long-term capital gains tax will be taxed at 10 per cent without indexation of cost. And if you sell within 12 months, short-term capital gains will be applicable in accordance with the Income Tax Act at your regular tax slab.

Safety

The safety aspect is what sets NCD apart from its other fixed income counterparts. In legal terms, they constitute direct and secured obligations of Tata Capital Ltd. and shall rank pari passu and with all their other existing direct and secured borrowings. Consequently, the claims of NCD holders will be superior to the claims of other unsecured creditors and other investors. That means,if the company were to wind up, NCD holders will rank above all unsecured creditors and other investors.

You may know that other fixed income investments such as bank or company FDs do not offer such security. Bank FDs are insured for a maximum of Rs 1 lakh whereas a company FD is an altogether unsecured debt. In other words, if the company were to default, the FD holders do not have a legal right on the assets of the company. A relevant example is the fixed deposit of coincidentally another Tata Group entity - Tata Motors.

Though the interest rate is more or less comparable, what makes the NCD score over the FD issue (notwithstanding that both issues are from the same group) is the risk-return factor. In this case, the NCD issue is secure whereas the security of the FD issue depends upon the health of the automobile industry in general and Tata Motors in particular.