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The National Highways Authority of India (NHAI) through its NHAI Infrastructure Trust (InviT) is offering Non-Convertible Debentures at a yield of 8.05% and a tenor of 25 years as per its prospectus filed with Sebi. The total size of the issue is ₹1,500 crores. The NCD issue will open on 17th October and close on 7th November 2022. The minimum application amount is ₹10,000. Thereafter you can apply in multiples of ₹1,000.
1. How much interest will the NCD pay?
The NCD will pay 7.9% interest semi-annually. Because this is a semi annual (6 monthly) payment, the effective yield works out to 8.05%. The mode of interest or refund or redemption payments will be direct credit, NACH mandate, RTGS, NEFT or registered/speed post.
2. What are the ratings for the NHAI NCD?
The NCDs have been rated AAA (Stable) by CARE Ratings and AAA by India Ratings and Research Pvt Ltd (Ind-Ra).
3. When will your principal amount be repaid?
Generally, NCDs pay back the principal amount at the end of the tenure. However this NCD is divided into 3 strips. NHAI will begin repaying the principal on the NCD from the 8th year on the first strip. About 5% of the face value of the NCD will be repaid from the 8th year onwards, with higher repayments in some years. NHAI has published a repayment schedule detailing the repayment timelines.
4. How will interest be paid?
Interest will be paid semi-annually (twice a year).
5. How to apply
You can apply for the issue through your stock broker. The money will be blocked when you apply (application supported by blocked amount or ASBA process) The NCDs will be held in your demat account. They will also be listed on the NSE and the BSE.
6. Is there premature exit?
No. But you can sell the NCDs on the NSE or BSE, if there is enough liquidity.
7. Is the interest taxable?
Yes. The interest is taxable at your slab rate.
8. Are there any tax benefits for investing in the NCDs?
No. Unlike the traditional section 54 EC bonds which give exemption from capital gains, this particular issue of NCDs has no tax benefits.
9. What about capital gains?
If you sell the NCDs after a holding period of 1 year and make capital gains on them, they will be taxed at 10% (without indexation). For less than 1 year, the capital gain is short term and hence at slab rate.
10. Should you invest?
The NHAI NCD compares favourably with FD rates which are currently in the 6-7% range. It also compares favourably with small savings rates. For example the 5 year national savings certificate carries an interest of 6.8%. However the taxation of interest is not favourable. If you are in the 30% tax bracket, your post tax yield falls to 5.63%. In contrast to this, investing in a target maturity debt mutual fund and withdrawing money from it after a 3 year holding period will get a more favourable tax rate. Long term capital gains on debt mutual funds carry a tax rate of 20% and you also get the benefit of indexation. For example, Bharat Bond 2032 matures in 2032 and has a yield to maturity of 7.76%. If we assume an effective rate of tax of 10% (after applying indexation), the post tax yield comes to 7%. However if you want a fixed interest every year and you don’t want the stress of mark-to-market gains or losses of debt mutual funds, the NHAI NCDs are a good option.
The lead Managers for the Issue are JM Financial Limited, A.K. Capital Services Limited, ICICI Securities Limited, SBI Capital Markets Limited and Trust Investment Advisors Private Limited.
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