Power Finance Corporation NCD: Should you invest?

Power Finance Corporation’s first tranche of NCD (non-convertible debenture) issue for Rs 5,000 crore opens for subscription on January 15. The issue closes on January 29 and has an option for early closure, too. The proceeds will be used for fresh lending as well as for refinancing and servicing the company’s existing debt.

The first tranche has seven series – I to VII – with varying tenure (three to 15 years), and interest type (fixed or floating), rate and interest payment frequency. There is no compounding option.

None of the options make the cut as alternate fixed income options such as bank fixed deposits, small savings schemes and the Government of India (GOI) 7.15 per cent floating rate savings bonds (popularly known as RBI bonds) score better. However, on grounds of better liquidity and wider availability as compared to the GOI floating rate bonds alone, retail investors can consider investing some portion of their surplus in the 10-year (series V) NCDs that offer a floating coupon rate linked to the 10-year G-Sec yield.

While PFC’s concentrated exposure to the troubled Indian power sector and the consistently negative cash flow from operations may be a cause for concern, the NBFC’s Central Government backing offers comfort. Government of India holds nearly 56 per cent stake in the company. Also, PFC’s capital to risk weighted assets ratio (CRAR) was at a comfortable 17.54 per cent as of September 2020.

Not the best

PFC is offering fixed coupon (interest) rates of 4.8 per cent and 5.8 per cent on its three-year and five-year NCDs, respectively. The interest will be paid out annually. Many banks offer better rates, and that too on deposits of shorter tenure. Given the historic low interest rates today, it’s best not to lock in to higher tenure fixed income products, to avoid losing out on better returns once the rate cycle turns up.

One- to two-year deposits from several public and private sector banks are available at rates of 5.1 to 5.3 per cent and 5.3 to 5.75 per cent per annum, respectively. A few other FDs come with even higher rates. DCB Bank, for instance, offers 6.35 per cent on its 15 to under 18 months deposit. Small finance banks, too, offer attractive rates. Equitas Small Finance Bank’s 1-year to 18 months deposit at an interest rate of 6.6 per cent is an option worth considering.

Better liquidity for floating rate option

Also, while rates on the 10-year NCDs (series III and IV) at 6.82 per cent and 7 per cent and on the 15-year NCDs (series VI and VII) at 6.97 and 7.15 per cent may appear attractive, note that these are fixed rates. The 10-year floating rate option, which offers a coupon of 80 basis points over the 10-year G-Sec yield (5.9 per cent now), is a better alternative. Today, the floating rate option can offer 6.7 per cent and this will be reset annually. Floating rates, though, will be subject to a floor rate of 6 per cent and a cap of 7.5 per cent for retail individual investors.

GOI floating rate bonds still seem better when compared on interest rates alone. Today, they offer 7.15 per cent (spread of 35 basis points above NSC). There is also no cap. But these are relatively less liquid. Premature redemption (after a few years) is allowed only to those 60 years and above.

On the other hand, the PFC NCDs can be sold in the secondary market before maturity.

Minimum investment and tax

Retail investors can put in a minimum of ₹10,000 across all series collectively and in multiples of ₹1,000, thereafter. The interest received on the NCDs will be taxed at your income tax slab rate.

If the NCDs are bought in the issue and held till maturity, they will be redeemed at face value – implying no capital gains and, hence, no tax. According to Archit Gupta, Founder and CEO, ClearTax, if the NCDs are sold after being held for up to 12 months, short-term capital gains, if any will be taxed at your slab rate. If the NCDs are sold after 12 months, then any long-term capital gains will be taxed at 10 per cent without indexation benefit.