Tag: secondary market

3 things to look at before you invest in NCDs

Personal Finance

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Of late, several NCD (non-convertible debenture) issues have been coming in the market. The current low interest rates on bank fixed deposits add to the appeal of these NCDs (or bonds) – both in the new issues as well as those trading in the secondary market.

If you are looking to invest in NCDs to better your debt returns, here are a few points to note.

Return metrics

The fixed coupon or interest rate, calculated on the face value of the bond is what an investor receives periodically (say, quarterly, half-yearly or annually) in the form of interest income. This is the ‘return’ most investors usually focus on. If you invest in an NCD in the primary issue and stay invested until maturity, then the periodic coupon or interest indicates your investment return.

Alternatively, if you buy an NCD in the secondary market and stay invested until maturity, then you must focus on the YTM (yield to maturity) rather than the coupon rate as the correct indicator of your return. The YTM takes into account not just the periodic coupons but also the price at which the bond is bought and redeemed to arrive at the total return. Let’s take an example. Secondary market data from HDFC Securities shows that AAA-rated Tata Capital Financial Services bonds (series – 890TCFSL23 – Individual) priced at ₹1,123 per bond, with a residual maturity of 2.07 years offer a coupon of 8.90 per cent and YTM of 6.79 per cent. A YTM lower than the coupon implies that a bond is trading at a premium. That is, the current market price of the bond is greater than its face value. The latter is what will be paid to you on maturity. In the prevailing low interest rate environment, an 8.9 per cent coupon bond commanding premium pricing is hardly surprising.

Then, there are NCDs that come with a call or put option. Callable bonds give the issuer the right to call back the bond before its maturity by paying back the principal. Putable bonds give the investor an option to exit before maturity and receive the principal. In case of NCDs with a call option, the appropriate return metric to look at is YTC (yield to call) and not YTM. The YTC is the return that an investor gets if the bond is held until the call date. Only very few retail NCDs come with such an option.

Exit or not

While NCDs get listed on the stock exchanges and provide the possibility of an exit option, not many can be bought and sold as easily as shares. This is due to the lack of adequate trading volumes for many NCDs in the retail segment. In such a case, one must be prepared to stay invested until maturity.

Once an NCD lists on the exchanges, it may trade at a price different from its issue price. Over time, the value of the bond will fluctuate in response to factors such as interest rate changes and ratings upgrades or downgrades. So, if you sell a bond before maturity, your final investment return will be impacted by the difference between the selling price versus the purchase price of the bond. This could result in a capital gain or loss for you. Today, with interest rates expected to rise, albeit not immediately, the existing lower-coupon bonds carry the risk of depreciating in value over time resulting in a possible capital loss when sold.

Taxation

The coupon or interest received from NCDs is taxed at your income tax slab rate. Short-term capital gains are taxed at your slab rate and long-term gains at a flat 20 per cent rate with indexation benefit. Capital gains on sale of NCDs that have been held for more than a year in case of listed NCDs and more than three years in case of unlisted ones are treated as long-term in nature.

NCDs in the retail segment quote at their dirty price. That is, the quoted market price is inclusive of the accrued interest on them.

According to Nimish Shah, CIO, Waterfield Advisors, when an NCD is sold, the differential between the sale price and the purchase price is segregated into two parts – capital gains and accrued interest – for taxation purposes. Let’s say, you buy a bond with a coupon of 8 per cent per annum (paid semi-annually) at a face value of ₹100 in January. Suppose this bond is trading at price of ₹110 on March 31. Since the first coupon payment is due in June, the accrued interest by March-end is ₹2. The difference between the sale and purchase price of the bond of ₹10 will be split into two parts – ₹2 accrued interest and ₹8 capital gains and taxed as such – when the bond is sold in March.

 

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RBI extends current a/c freeze deadline, BFSI News, ET BFSI

Banking & Finance

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Mumbai: The RBI has given banks time until October 31 to comply with its circular on introducing discipline in the opening of current accounts.

The RBI has said that banks should escalate to the Indian Banks’ Association (IBA) any issues they face in implementing the directive, and if it still remains unresolved they should be forwarded to the RBI for regulatory consideration.

According to a PSU bank chief, the RBI in its meeting with public sector lenders made it clear that the circular needs to be implemented in spirit but if there are operational issues faced by customers, they should be resolved at the industry level.

In a fresh circular on the guidelines for current accounts, the RBI reiterated that it does not apply to borrowers who have not availed of cash credit (CC) or overdraft (OD) facility and the banking sectors exposure to them is below Rs 5 crore.

In the case of borrowers who have not availed of CC/OD facility from any bank and the exposure of the banking system is Rs 5 crore or more but less than Rs 50 crore, there is no restriction on lending banks to such borrowers from opening a current account. Even non-lending banks can open current accounts for such borrowers though only for collection purposes.

According to bankers, technically there is no reason for a borrower with CC/OD facility to undertake transactions through another account. Bankers said that the main reason why many borrowers sought to keep a separate current account was to control their collections. “Many customers choose to transfer funds from their other account to repay their loans as they fear that using their loan account for collections could lead to problems when they are short on funds,” said a banker.

However, several businessmen said that while they have old loans with public sector banks, they need the technology-based products of private banks particularly in the area of trade finance. The central bank’s circular comes at a time when some customers in Kerala initiated legal action to stall the implementation of the RBI directives.



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At G-Sec auctions, bid at yields closer to the prevailing secondary market level: RBI to PDs

Banking & Finance

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The Reserve Bank of India (RBI) is understood to have asked primary dealers(PDs) to bid at Government Security (G-Sec) auctions at yields closer to the prevailing secondary market level.

This comes in the backdrop of some PDs bidding at higher yields (or quoting lower price) to buy G-Secs at auctions at a time when the government borrowing programme for FY22 is huge at ₹12.10 lakh crore.

Currently, the central bank is undertaking G-Sec Acquisition Programme (G-SAP) as well as special open market operations to keep the yields under check.

Also read: Investors’ interest in 2030 G-Sec wanes

So, the central bank expects PDs, whose primary role is to support the Government’s market borrowing programme and improve the secondary market liquidity in G-Secs, to bid accordingly as they get a fee for their underwriting commitment at G-Sec auctions.

Cost of borrowing

Market players say if yields quoted by bidders at G-Sec auctions are higher than the prevailing secondary market yields, the RBI either devolves the auction on PDs or rejects all the bids. This ensures that the Government’s cost of borrowing does not go up.

Meanwhile, on a review of market conditions and market borrowing programme of the government, RBI has decided that the benchmark securities of 2-year, 3-year, 5-year, 10-year, 14-year tenors and floating rate bonds (FRBs) will be, henceforth, be issued using uniform price auction method.

For other benchmark securities — 30-year and 40-year — the auction will continue to be multiple price-based auction, as hitherto.

In a uniform price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same rate at the auction cut-off rate, irrespective of the rate quoted by them. In a multiple price auction, the successful bidders are required to pay for the allotted quantity of securities at the respective price/ yield at which they have bid.

At the weekly G-Sec (GS) auction,the RBI devolved about 95 per cent of the notified amount of ₹11,000 crore the Government wanted to raise through the 2026 G-Sec (coupon rate: 5.63 per cent) on PDs.

Greenshoe amount

The auction of three other papers — Government of India FRB 2033 (notified amount: ₹4,000 crore), 6.64 per cent GS 2035 (₹10,000 crore) and 6.67 per cent GS 2050 (₹7,000 crore) — sailed through. In fact, RBI accepted greenshoe amount of ₹2,500 crore in the case of GS 2035.

In the secondary market, yield on the devolved 2026 G-Sec went up about 5 basis points to close at 5.75 per cent(previous close:5.70 per cent), with its price declining about 21 paise to close at ₹99.49 (₹99.70).

Bond yields and price are inversely related and move in opposite directions.

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