The NHAI has launched its new NCDs issue to raise up to ₹1500 crores. The bonds, which will be issued by the National Highways Infra Trust (NHIT) from October 17 to November 07, will pay 7.90 per cent interest semi-annually, which is slightly higher than the rate offered by bank-sponsored fixed and recurring deposits.
The effective yield would turn out to be 8.05 per cent for all NCD holders every year. Both CARE Ratings Limited and Research Private Limited have rated these bonds ‘CARE AAA/Stable’ ‘IND AAA/Stable’, respectively.
Affordable for retail investors
The NCD issue will have a base issue size of ₹750 crores, with the NHIT allowed to retain an additional ₹750 crores if it is oversubscribed. The NHIT has announced the minimum application size as ₹10,000, i.e., the price of 10 NCDs and in multiples of ₹1,000 (i.e., one NCD), thereafter. The small ticket size will allow retail investors to park their funds in them as opposed to many other NCDs open for institutional investors, non-institutional investors, and high-net-worth individuals.
Applying for these NHAI-sponsored NCDs is simple as all applicants shall mandatorily apply in the Issue through the ASBA process only. Applicants intending to subscribe to the issue shall submit a duly filled application form to any of the designated intermediaries.
To invest or to not invest?
However, are affordability, high credit ratings and a relatively higher IRR enough to entice investors to buy these NCDs? Decoding what investments in these NCDs means looking into benefits beyond interest rates and credit ratings. Gullible investors who look no more beyond returns and costs must be aware of certain factors that may compel them to rethink their decision to park their earnings in these funds.
Far-off maturity dates
The tenure of the investment has been fixed at 25 years, thus, labelling it as a long-term investment option. Suresh Goyal, MD & CEO of National Highways Infra Investment Managers said, “The NCD has three different tenures, with three different face values as well as maturity and redemption period with maximum redemption period being 25 years. The staggered redemption and maturity period of 13 years, 18 years and 25 years respectively, gives the investor steady income on investment will 25 years period.”
No tax benefits
The NHIT does not intend to become a publicly listed Infrastructure Investment Trust (InvIT) soon. Goyal said, “The institutional investors including both foreign and domestic players who have parked their money in NHIT have shown keen interest in holding on to their shareholding,” adding, “We will go forward with the next two rounds of fundraising before looking to become a publicly listed InvIT.”
The BSE Limited, which serves as the issue's designated stock exchange, and the National Stock Exchange of India (NSE) would both list the NCDs. This implies that these listed bonds would not offer any indexation benefits, in contrast to debt mutual funds, which have minimal tax implications.
Late redemption of investments
The NCDs that would be issued on a first-come-first-serve basis would consist of three Separately Transferable Redeemable Principal Parts (STRPPs). These would be allotted in dematerialized forms with each STRPP being a trading lot. The NCDs would be redeemed gradually at distinct face values and different maturities.
Goyal added, “There are three STRPPs with a different face value of ₹300 for 13 years, ₹300 for 18 years and ₹400 for 25 years. Each STRPP has a different redemption date and maturity, for STRPP A and STRPP B with 13 years and 18 years of maturity respectively, with a staggering redemption by face value for each STRPP as per ‘Principal Redemption Schedule and Redemption Amounts’.
It will be paid in six annual payments of ₹50 each starting from the 8th and 13th anniversaries until maturity. For 25 years of maturity, with a staggering redemption by face value for each STRPP as per the ‘Principal Redemption Schedule and Redemption Amounts’, it will be paid in eight annual payments of ₹50 each starting from the 18th anniversary until maturity.”
Are these NCDs worth investing in?
It all boils down to what kind of investor you are. If you are retired and do not have a regular source of income, you can invest in these bonds for the fixed half-yearly interest. However, please check the tax bracket you fall in. If your annual income falls in a higher tax bracket, staying in these bonds would not amount to much as you would be taxed as per the given rates at the time of maturity. However, if you fall in a low or zero tax bracket, you may consider putting a part of your earnings in it to continue earning semi-annual interest for the next 25 years.
Pratibha Girish, Founder, Finwise Personal Finance Solutions said, “In today’s environment when debt mutual funds give decent yields, I would not recommend NCDs for a small differential in yields. Debt funds come with better taxation and complete liquidity hence they are my go-to instruments for debt allocation.”
“This could be one of the debt options for a long-term debt portfolio. It gives predictable cashflows over the next few years. It's very difficult to predict long-term interest rate movement. If one locks in money at these rates there could be an opportunity loss if rates move up after they lock in investments. The downside is the interest is taxable and it cannot be liquidated easily. It is possible to get better tax-adjusted returns with other instruments like debt mutual funds over the short and medium term,” added Girish.
Rahul Agarwal, Proprietor, Advent Financial shares, "Like all investment products, assessing the suitability of the NHAI bond as an investment proposition must be done in the context of one’s own unique financial situation and personal circumstances. An investment is only as good as it serves a purpose; that purpose could be as simple as diversifying the portfolio or meeting specific cash flow requirement(s) at a future date. Once the purpose is determined, the next prudent step that an investor must undertake is to evaluate all available alternatives as per his/her investment knowledge and experience, risk profile, time horizon, liquidity requirements, tax impact and any other pertinent factors that apply to the investor’s unique situation."
Explaining who may or may not invest in this bond, Agarwal explains, "While it would be difficult to make a generalized recommendation either for or against investing in the NHAI Bond, it can be said that it comes with the backing of a quality PSU company and as such has a very low risk of default in principal and interest repayments (aka credit risk). It could be well-suited for investors with cash flow requirements akin to an annuity (albeit for a limited period of time) and who don’t have an issue with staying invested in the bond for the long term. While the bonds will be listed on the exchange, it would be premature and imprudent to take trading volumes and liquidity as a given."
Affordability does not equate to buying opportunity. High returns do not translate to immediate investments. Not all investments are worth consideration. Given the pros and cons of these NHAI-backed NCDs, it makes sense to think twice before parking your earnings in them.