NCD IPOs, or Non-Convertible Debenture Initial Public Offerings, have gained popularity among retail investors in recent years. These financial instruments provide a way for individuals to earn a steady income, making them an attractive option for those looking for safer investments compared to stocks. NCDs offer investors a fixed return and open doors to the corporate debt market in India.
Understanding NCD IPOs
NCD IPOs involve companies issuing debt securities to the general public, allowing them to raise funds multiple times, unlike equity IPOs. For instance, in 2023, Muthoot Fincorp issued NCD IPOs four times throughout the year. Each issuance might have varying tenors and interest rates based on the prevailing conditions at the time.
Companies have the option to file a separate prospectus for each issuance or utilize a shelf prospectus. A shelf prospectus allows for the issuance of securities over time without the need for a new prospectus each time. In such cases, a tranche prospectus is prepared for each tranche, detailing the specifics. This chapter will explore the fundamental terms associated with NCD IPOs, aiding in a clearer understanding of these offerings.
Key Terminology in NCD IPOs
1. Shelf Prospectus
A shelf prospectus is a document filed by a company with the regulator, registering NCDs it plans to offer over a designated period without needing a new prospectus for each issue. Typically, a shelf prospectus remains valid for one year. It includes vital information to help investors make informed decisions. Companies must submit both draft and final versions of the shelf prospectus to the regulator.
2. Tranche Prospectus
For each NCD issuance, a tranche prospectus is issued, providing details of the offering and any changes from the shelf prospectus or earlier tranche prospectuses. It is a subset of the shelf prospectus and should be read together with it.
3. Shelf Limit
The shelf limit is the maximum amount a company can raise through NCDs in one or more tranches.
4. Base Issue Size
This term refers to the minimum size of an NCD issue.
5. Option to Retain Oversubscription
Companies can retain up to 100% of the base issue size if there is oversubscription, subject to credit rating and management approval. Known as the "green shoe" option, this allows issuing more NCDs than initially planned to meet demand.
6. Tranche Issue Limit
The tranche issue limit accounts for oversubscription and should not exceed the shelf limit. For example, Indiabulls Housing Finance's NCD issuances in 2023 illustrate these terms:
- Shelf limit: Rs. 2,000 crores
- Base issue size per tranche: Rs. 100 crores
- Oversubscription option: Rs. 100 crores per tranche
- Total raised in four tranches by December 2023: Rs. 800 crores
- Remaining shelf limit: Rs. 1,200 crores until June 2024
7. Prospectus
Most companies issuing NCDs file a shelf prospectus due to the repetitive nature of fundraising. Filing a fresh prospectus for each issue is cumbersome. However, some companies may issue a fresh offer document each time, and not all are eligible under SEBI guidelines (discussed in later chapters).
8. Overall Issue Size
Refers to the maximum size of the NCD issue when a company files a prospectus instead of a shelf prospectus.
9. Debenture Redemption Reserve (DRR)
A DRR is a fund set aside by companies to ensure they can meet debenture redemption obligations. Previously mandatory for all, recent changes in regulations have exempted many companies from maintaining a DRR.
10. Face Value
The face value is the original value of the debenture as stated on its certificate. NCDs are issued at this value, and the application amount is based on it.
11. NCD Holder
An NCD holder is listed in the company's records but is not a shareholder. Their rights are limited to matters concerning the NCD.
12. Coupon Rate
This is the interest rate the company pays on the NCD securities.
13. Coupon Payment Frequency
Investors can choose how often they receive interest: monthly, annually, or cumulatively.
- Monthly: Interest is paid monthly.
- Annually: Interest is paid yearly.
- Cumulative: Interest is paid at maturity, along with the principal.
14. Effective Yield
The effective yield is the total return an investor receives upon maturity. It's typically higher for cumulative interest options due to reinvestment.
15. Redemption Date
The redemption date is when the company repays the debt security, including interest, based on the investor's choice.
16. Redemption Amount
This is the amount paid to the investor at maturity. For cumulative plans, it includes both interest and principal.
17. Incentive
Incentives are additional interest rates offered to specific investor categories, such as high-net-worth individuals or current NCD holders.
18. Put Option and Call Option
Some NCDs feature call and put options. A call option allows the company to redeem the NCD early, while a put option lets the investor redeem it before maturity.
19. Day Count Convention
This refers to the method for calculating the number of days for interest calculations. Payments on non-working days are adjusted to the next business day.
Consider an NCD offering 9.25% interest over 24 months with different interest payment options. If allotted on 27th July 2023, the day count convention determines how interest is calculated and paid based on the chosen frequency.
Understanding these terms is crucial for anyone considering investing in NCD IPOs, as they help in evaluating the investment's potential returns and risks.
