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Business News/ Money / Calculators/  Product crack: Edelweiss non-convertible debenture
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Product crack: Edelweiss non-convertible debenture

Investors can choose from monthly or annual coupon payouts and a cumulative option

Priyanka Parashar/MintPremium
Priyanka Parashar/Mint

ECL Finance Ltd, the non-banking financial company (NBFC) of Edelweiss Financial Services Ltd, plans to raise 400 crore, with an oversubscription limit of another 400 crore, through the issue of secured, redeemable, non-convertible debenture (NCD).

There are two tenors on offer, 36 and 60 months. Investors can choose from monthly or annual coupon payouts and a cumulative option (accumulated interest is paid along with capital at maturity). The coupon and yield (cumulative option) range from 10% to 10.60% per annum. The bonds will be issued in both physical and dematerialized formats and are proposed to be listed on BSE Ltd. So, if you want to sell before maturity, you can take the secondary market exit route for dematerialized bonds.

What works...

Few products offer monthly income; NCDs being one of them. The monthly interest coupon of 10% for 36 months and 10.15% for 60 months means you can earn up to 1,000 and 1,015 (pre-tax), respectively, per month, on an investment of 1 lakh. The issue is rated CARE AA and ICRA AA (stable), which indicates high financial stability and ability to meet financial obligations.

ECL has raised public issues thrice. It wants to broaden its funding sources and, thus, will continue to raise funds from the public as business grows. There is a long-term need for retail funding which the company is committed to.

At present, the NBFC scores well on basic financial health parameters such as capital adequacy and non-performing assets. The Edelweiss group is known for its strict risk management processes. For an NBFC in the lending business, the risk of default by the borrower is inherent, and the ECL Finance management takes this into account from product initiation to execution level. Risks are monitored real-time, which gives them early warning of a potential default. Risk monitoring is also done at a group level, by a global risk committee, and at the board level. Roughly 87% of their overall advances are secured.

...what doesn’t

An NBFC’s business environment is largely dependent on the overall economic growth of a country. At present, India’s economic growth hasn’t recovered and if the momentum doesn’t pick up, the NBFC’s business will be affected. Moreover, for investors, interest earned is taxable; for those in the highest tax bracket, post-tax return will be 6.9-7.3% per annum (across options). This isn’t very attractive and you will be better off investing in a short-term income fund. For those in the 10% and 20% tax brackets, the post-tax payouts will be 9.5% and 8.4% per annum, respectively, for the 60-month bond with annual payout.

Interest earned on the monthly payout option is lower than on the annual payout and cumulative option. To maximize the yield through monthly payout option, you will have to reinvest the money each month in a similar bond. More importantly, investing in a corporate bond requires you to be comfortable with the issuing company and its fundamentals. You need to assess that first. If you don’t need monthly income, opt for the three-year cumulative payout bond.

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Published: 25 Feb 2015, 07:24 PM IST
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