, 13 tweets, 10 min read Read on Twitter
There have been a flurry of public issue of NCDs lately. These issues are primarily from NBFCs who are finding it tough to raise funds though banks and MFs. Here, I explain why the public issue NCDs are not in the interest of retail investors. Thread (1/9)
A) There is a common misconception that public issue NCDs are akin to Fixed Deposits (FDs). FDs of PSU banks are covered under the umbrella limit of 1 lakh deposit insurance. NCDs are not. A case in point is the expected loss to retail investors in DHFL public issue NCDs. 2/9
B) The rate offered by these NBFCs in public issue is much lower than what they offer in privately placed deals. Further, a substantial fee is cornered by brokers for selling these NCDs to retail investors. 3/9
C) There are barely any restrictive covenants in the public issue NCDs. On the other hand, Institutional investors put a lot of covenants in the privately placed NCDs and hence are often able to exit an investment much before retail investors could. 4/9
D) Retail investors do not have any understanding of the credit-worthiness of companies. They usually base their decisions on credit ratings and/ or broker recommendations. The track-record of both rating agencies and brokers, in this regard, leaves a lot to be desired. 5/ 9
E) Some companies even raise subordinated NCDs through public issue. Subscribers of subordinated NCDs are paid after senior NCD holders in-case the company goes belly-up. Gullible retails investors often end up subscribing to subordinated NCDs without understanding the risks. 6/9
F) FDs can be broken with nominal penalty in case of emergencies. Public Issue NCD holders often have to depend on secondary markets to get an exit. Secondary markets are quite shallow and often do not provide a timely exit to retail investors. 7/9
G) There are no indexation tax benefits for investors of NCDs. On the other hand if the money is invested in debt schemes of Mutual Funds, there are significant indexation benefits for investors holding the units for over 3 years. 8/9
Conclusion - Investing in public issue NCDs are fraught with risks. Only informed investors should look to invest in such instruments. 9/9
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