NCD IPO

In recent times, NCD IPO has become very popular among retail investors as it offers investors an opportunity to earn a fixed income at regular intervals. The NCD IPO opens up access to the Indian corporate debt market. Compared to equities, NCDs are considered a safer investment option as investors are guaranteed a fixed return.

NCD IPO Meaning

NCD IPO is the issuance of debt securities by companies to the general public. Unlike Equity IPO, a company can issue NCD IPO multiple times if it needs funds. For example, in 2023, Muthoot Fincorp issued NCD IPO 4 times in a year. Each NCD issue has a different series of tenor and interest rates depending on the interest rates prevailing at the time of issue.

A company can either file a separate prospectus for each issue or a shelf prospectus that allows it to offer securities over a period of time without filing a new prospectus. In these cases, the company must prepare a tranche prospectus containing the details of each tranche. In this chapter, we will cover the basic terms related to the issue of NCD IPO which will facilitate the understanding of NCD IPO.

NCD Terms

1. Shelf Prospectus

A shelf prospectus is the offering document that a company files with the regulator to register NCDs that it intends to offer over a specified period of time without having to file a separate prospectus for each offering. A shelf prospectus is usually valid for one year.

The shelf prospectus contains all the necessary information to help investors make an informed decision about their investment. A company must submit a draft and a final shelf prospectus with the regulator.

2. Tranche Prospectus

The Tranche Prospectus is the offering document issued for each NCD issue and contains the details of the issue and any material changes contained in the shelf prospectus or earlier Tranche Prospectus. The Tranche Prospectus is a subset of the Shelf Prospectus and must be read in conjunction with the Shelf Prospectus.

3. Shelf Limit

Shelf limit is the maximum size of an NCD issue. The company can raise funds in one or more tranches up to the shelf limit.

4. Base Issue Size

The base issue size is the minimum size of an NCD issue.

5. Option to retain oversubscription

The issuing company may retain an oversubscription of up to 100% of the base issue volume. The retention of the oversubscription limit is subject to the credit rating and approval of the company's Management Board. This option to retain oversubscription also known as the "green shoe" option, allows the issuing company to sell more NCDs than the minimum issue size to meet the demand.

6. Tranche Issue Limit

The tranche issue limit is the issue size post considering the option to retain oversubscription. The total tranche issue limit for the different tranches should not exceed the shelf issue limit.

Let us have a look at the NCD issues by Indiabulls Housing Finance in 2023 to understand the above terms

In June 2023, the company filed a shelf prospectus to raise up to Rs. 2,000 crores. Thereafter, the company offered NCDs in tranches in June, August, September and December 2023. The following excerpts from the NCD prospectus show that,

• The shelf limit of the issue is Rs 2,000 crores.
• The base issue size per tranche is Rs 100 crores. (Note: It may vary per tranche).
• The company wishes to retain oversubscription up to 100% of the base issue size. Thus, the tranche issue size per tranche is Rs 200 crores. (including Rs 100 crores of oversubscription)
• The company has offered to raise Rs. 800 crores in four tranches by December 2023.
• The Company may further raise the unutilized amount of the Shelf Limit of Rs. 1,200 crores in one or more tranches till June 2024. (within one year from the date of issue of the Shelf Prospectus).
• Once the validity of the shelf prospectus expires, the company will have to file a new prospectus to raise further funds.

7. Prospectus

Generally, all companies planning an NCD issue file a shelf prospectus as companies raise funds through NCDs over a period of time and filing a fresh prospectus every time is a little tedious task. However, some companies choose to file a fresh offer document every time and some companies may not be eligible to issue a prospectus as per SEBI guidelines. (The criteria are discussed in a later chapter of the offer document).

In such cases, the company issues a draft prospectus and final prospectus just as done in the case of Equity IPO.

8. Overall Issue Size

Overall Issue Size is the maximum size of the NCD issue. This term is used to refer to the issue size of NCDs when a company files a prospectus instead of a shelf prospectus.

9. Debenture Redemption Reserve

The debenture redemption reserve, commonly referred to as DRR, is a fund maintained by the company for the payment of upcoming maturing debentures. Earlier, it was mandatory for all companies to maintain DRR as the company had to pay a penalty in case of non-compliance. The DRR was created from the funds earmarked for paying dividends or from a certain share of profits. The main purpose of the DRR was to reduce the likelihood that the company would be unable to meet its maturity obligations.

In accordance with the recent amendments to the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules 2014 and SEBI NCS Regulations, many companies are either exempted or have relaxations for the maintenance of DRR. The Company will provide the information on DRR requirements, if any, in the Prospectus.

10. Face Value

The face value of the debenture is the original value of the debenture as mentioned on its certificate. It is the face value of the security, also known as the par value. The NCDs are issued at the face value. The NCD application amount is payable according to the face value and the number of debentures applied for.

11. NCD Holder

NCD holder is the holder of the debenture in the company records. An NCD holder is not a shareholder of the company. Therefore, the rights of the NCD holder are limited and restricted to any changes or matters relating to the NCD.

12. Coupon Rate

The coupon rate is the rate of interest that is paid by the company on the NCD securities.

13. Coupon Payment Frequency

An NCD issue offers investors various options to choose the frequency of interest payments. An investor can choose to receive interest either monthly, annually or cumulatively.

• Monthly - In the case of a monthly interest payment option, the company is required to pay interest to the NCD holders monthly.
• Annually - In the case of the annual interest payment option, the company is required to pay interest to the NCD holders yearly.
• Cumulative - In the case of the cumulative interest payment option, the interest is paid together with the principal amount on maturity.

14. Effective yield

The effective yield is the total return that an investor receives when his investment matures. The effective yield in case of cumulative interest payment option is always greater than the monthly or yearly interest payment option, as the interest amount is reinvested at the same rate until maturity.

15. Redemption Date

The redemption date is the date on which the debt security must be repaid. It is the maturity date on which the investor receives his investment amount back with interest in accordance with the option chosen by the investor.

16. Redemption Amount

The redemption amount is the amount to be paid by the company to the investor in accordance with the selected plan. If the investor has chosen a cumulative plan, the entire investment amount together with the interest for the corresponding period will be paid by the Company as the redemption amount. In the case of monthly or annual interest payment plans, the investor only receives the principal amount and the interest for the coming month or year as a repayment amount.

17. Incentive

Incentive is an additional rate of interest offered for certain categories of investors applying for NCD. Generally, this incentive is offered to HNIs and resident individuals provided they are :

• NCD holders of any previously issued NCD by the company and/or Subsidiaries.

AND/OR

• Equity shareholders of the said company as on the deemed date of allotment.
• The fresh NCD issue applied for is held till the relevant record dates of interest payment.

The details of the investor category and the interest incentive are mentioned in the offer document.

18. Put Option Call Option

Certain NCDs have a call and a pull option. In a call option NCD, the issuing company can call the NCD before maturity, i.e. it can buy back/repay the NCD before the redemption date, whereas in the put option, the NCD holder has the right to redeem the NCD before the maturity date. The Call Option and the Put Option may be exercised after the completion of a specified term of the NCD as mentioned in the Offer Document. If the Company has issued an NCD without Call Option and Put Option, the same will be specified as NA (not available) in the Offer Document.

An NCD with a call option usually has a higher interest rate than an NCD with a put option because an NCD with a call option is in favor of the issuing company, which has the right to buy it back at any time after a certain period of time.

19. Day Count Convention

The days count convention is the number of days for calculating interest. Interest calculations are performed for the actual days the NCD is held/invested.

Points to note:

• If the interest payment date falls on a non-working day, the payment will be made on the following working day. However, the interest amount will be calculated according to the original dates.
• If the maturity date falls on a public holiday, the principal amount will be paid on the immediately preceding working day.
• If the last interest payment date falls on a public holiday, the interest is paid for the number of days that have accrued on the NCDs till maturity.

Example:

An NCD is offering 9.25% interest for a tenor of 24 months with monthly, annually and cumulative interest payment options. Let us see how the number of days are calculated for payment.

Assumption: NCD got allotted on 27^th July 2023 (Thursday)

The above table shows that if the interest payment date falls on a Saturday or Sunday, the interest is paid on Monday, i.e. the next working day. If the maturity date falls on a non-working day such as Saturday or Sunday, the maturity proceeds and any interest are paid on the previous working day, in this case Friday.