SREI Equipment Finance NCDs: Should you subscribe?

 (Photo: Mint)

SREI Equipment Finance (a wholly owned subsidiary of Srei Infrastructure Finance) is issuing secured Non Convertible Debentures (NCDs) with interest rates (technically called coupons) up to 10.65%. The company’s overall NCD programme as covered by the shelf prospectus is to raise an amount up to Rs1,700 crore. In this tranche however, the company is seeking to raise Rs100 crore from the issue with the option to retain another Rs400 crore in case of over-subscription. Srei Equipment Finance is an NBFC (Non Banking Finance Company) engaged in the financing of equipment used in construction and allied sectors. The NCD offer will be open from 19th August to 18th September. The NCD has been rated AA (Outlook: Negative) by Brickwork Ratings and AA- by ACUITE Ratings.

The NCDs will be issued for periods of 1-year and 1-month, 2 years, 3 years and 5 years. The payouts being offered in different variants – monthly, quarterly, annual and cumulative. The minimum investment amount is Rs10,000 and you can apply for higher amounts thereafter in multiples of Rs1,000. The NCD is being divided into 10 buckets with different coupon rates and interest payment frequencies (called Series). The coupon rates for the different NCD series range from 9.88% (Series II) to 10.65% (Series IX). Series I, IV, VII and X do not have coupons as such. The interest payout on them is cumulative (interest paid on maturity). They have yields of 10.01%, 10.26%, 10.40% and 10.66% respectively. Series I has a tenor of 1 year and 1 month. Series II, III and IV have a tenor of 2 years, V, VI and VII have a tenor of 3 years and VIII, IX and X have a tenor of 5 years . Existing holders of the company’s bonds or NCDs or those of Srei Infrastructure Finance Ltd (SIFL) will be given an additional interest rate of 0.25% per annum. This incentive will also be given to shareholders of SIFL, senior citizens and the company’s employees. However the incentive is not being offered in the NCD variants which have cumulative payments.

Should you apply?

NCDs are highly risky instruments and have poor liquidity. This factor is more acute for NCDs rated less than AAA which is the case here. Investors should also take the past track record of the ratings agencies involved into account. In this case, the agencies are Brickworks and ACUITE Ratings. The interest on NCDs is fully taxable although no tax is deducted (TDS) on interest paid by NCDs listed on a recognised stock exchange. The Srei Equipment are proposed to be listed on the Bombay Stock Exchange (BSE). However rather than buying individual NCDs, Investor can buy into a diversified basket of NCDs through debt mutual funds. Gains in debt funds after a 3 year holding period are taxed at 20% and given the benefit of indexation.

How to Apply

If you still want to apply for the debenture issue, you need to submit an application form to your bank or broker, authorizing the intermediary to block the amount. The bank needs to be a self-certified syndicate bank (SCSB), a list of which you can get here.

Some banks or brokers will allow you to submit this form online.

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