The National Highways Authority of India Infrastructure Trust’s (NHAI InVIT) non-convertible debenture (NCD) issue, launched on October 17, was fully subscribed on the very first day. The company is likely to issue a 24-hour notice today and close the issue by October 19. This leaves a small window open for retail investors to invest, but you might at best get a partial allotment.
NHAI InVIT is an infrastructure investment trust sponsored by NHAI. It aims to raise Rs 1,500 crore through NCDs offered to both retail and institutional investors. NHAI aims to utilise this money to build roads and highways across India.
The bonds are meant for long-term allocation and come with an interest coupon of 7.9 percent per year. Does it make sense for the individual investor to add this to their long-term debt portfolio?
What’s to like
NHAI is a government of India entity and the funds raised will go into its core road building operations.
Although NHAI is a government-backed company, the returns are not guaranteed. But being a AAA-rated firm lends comfort to those seeking a low-risk option with timely payment of interest and principal.
The debenture issue offers three options: the first one is redeemable from the end of the 8th year, the second from the end of the 13th year and the last one is redeemable from the end of the 18th year. Hence, you can choose to remain invested and make the most of a long-term, locked in interest rate.
The minimum investment required is Rs 10,000, with half-yearly interest payment, which is a good way to earn a regular income. The NCDs are secured and unlike some other long-term debt investment options, there is no upper limit on the investment amount. Hence, you can plan your allocation based on the regular income you desire.
At a coupon of 7.9 percent a year, pre-tax, the return is above the expected long-term inflation rate of 6 percent a year.
What’s not to like
It’s hard to visualise how interest rates will move over such a long period. Locking in returns now may mean you miss out on higher rates in the future. Also, the interest is taxable; this is not a tax-free bond.
This NCD is a bit different from typical NCDs we know of in the market. Take the case of its longest-tenured option, the 25-year option. The NCD will pay you interest, twice a year, for 18 years. From the 19th year, the NCD will start repaying the principal, but in instalments — Rs 50 a year for a Rs 1,000 bond.
The staggered redemption of the NCD means that your interest pay-out will be lower in absolute terms starting from the end of 18 years (see the table for the payment schedules of the other options).
Unlike a typical bond where you get paid the interest amount till the end of the tenure, and then you get your principal in a lump sum, the NHAI InVIT will start repaying the principal in instalments, along with interest on the remaining, unpaid principal.
“NHAI has very long-term projects and it wants to make sure that it doesn’t default on payments. It also wants to reduce its cost of capital, so it has chosen to repay the principal in instalments,” says Vikram Dalal, Founder and MD, Synergee Capital Services.
While the bonds will be listed on exchanges, liquidity, or how much they are traded on a daily basis, is likely to be low.
This means, if you are seeking an early exit via a secondary market sale, it may take some time to materialise.
What should you do?
Such a high quality issue can find a place in your long term debt portfolio if you are looking for regular income. You can receive a regular income of Rs 39,500 every six months on an investment of Rs 10 lakh.
According to Deepak Chhabria, CEO, Axiom Financial Services, “There is an appetite for good quality bonds, especially those issued by government-backed organisations. This particular issue can be of appeal to those who have a very long-term investment horizon. One has to be mindful of the taxes though. It makes more sense for those in the lower income tax bracket.”
If you wish to get a piece of this issue, make sure you subscribe today, October 18. But plan for a partial allotment as the issue has got over-subscribed already.
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