NCDs

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Investors should look at the financials and ratings of cos that offer debentures before buying their schemes

Many companies reward their shareholders by offering an extra interest of 0.25-0.50% on the initial public offering (IPO) of NCDs and fixed deposits. For example, ECL Finance (Edelweiss Group) and SREI Finance are offering an extra interest of 0.25% on their NCDs to shareholders of their promoter company.

GATI offers 0.5% extra on its fixed deposit to shareholders. Sure, no debt, investors would let go of an opportunity to earn half a percent extra. But is it worth buying a small number of shares of these companies to earn extra returns?

Well, it depends on the company you are choosing, say experts. It's profitable to become a shareholder by buying a few shares to earn that higher interest on the NCD of ECL Finance and SREI Finance. However, experts ask investors to go for the extra returns only if they are comfortable with the ratings and financials of the company. Do not get carried away and become a shareholder of a company just because it is offering an extra interest. Invest in NCDs or FDs only if you are convinced with the financials and ratings of companies.

Youneed to be a shareholder before the allotment of NCDs is made. Take the case of ECL Finance's NCD issue, which opens on January 16, and its parent company is Edelweiss Financial Services (EFSL).

Now, assuming you wish to invest . 1 lakh in the NCD issue for a tenure of five years. EFSL trades at . 29 per share, and to buy five shares, it might cost you approximately . 150. If you get a 0.25% extra interest, you will earn . 250 extra per year on your investment of . 1,250.

The additional interest you earn is far higher than the amount you invested to become a shareholder, thereby making sense to buy shares. Similarly, SREI Infra's IPO is open which offers you 0.25% extra. You can buy five shares for . 125 and get an extra 0.25% interest.

Similarly, there are companies, which pay an extra 0.50% on their fixed deposits. For example, GATI pays an extra 0.5% to its shareholders. GATI trades at . 55. So, it will cost you about . 200 to buy three shares. If you invest . 50,000 in its fixed deposit, you can earn an extra interest of . 250 per year.

As for the rules of the game, in the case of a fixed deposit, the shareholder should hold shares on the deposit date. While making the FD, he should attach a photocopy of the demat statement along with his application form. In the case of NCDs, the extra interest will be payable, provided NCDs are held by shareholders on the relevant record date applicable for payment of interest.

Play it Smart

Buy 1-5 shares of Edelweiss Finance, which will cost you 150 to become a shareholder, and get 0.25% extra interest

You need to be a shareholder, both on the deemed date of allotment and also on the relevant Record Dates applicable for payment of coupon and redemption of NCDs respectively

Additional interest of 0.25% pa will be paid only on NCDs allotted in the IPO and not on any additional NCDs that the investor has acquired after the IPO

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