Adani Enterprises 9.9% NCD Review, Features and Eligibility

Adani Enterprises is offering 8 series of NCDs with various maturities of 24, 36, and 60 months. These NCDs are offering with effective yield of 9.25% to 9.90%.

Adani Enterprises Limited, the leading company of the Adani Group, initiated its inaugural public offering of secured non-convertible debentures (NCDs) on September 4, and is currently experiencing strong interest from retail investors.

What are debentures?

Debentures are nothing but you are lending the money to the company. In return, the company is promising you the interest rate and return of principal at the specified time period. Then what is the difference between debentures and bonds?

In the case of India, the difference between bonds and debentures are same. However, there are slight differences only the reasons for which companies borrow money from us (investors). Usually, bonds are meant for long-term company borrowing. However, debentures are meant for meeting short-term company requirements.

Types of Debentures

Let us now understand the different variants of debentures.

Convertible and Non-Convertible Debentures

Convertible debentures mean after the specified time, these debentures are converted into shares (stocks) of the company. Up to that conversation, you will enjoy the fixed specified coupon (interest rate) on such debentures. After that, your earnings depend on the price appreciation of the stock or the dividend income you receive (if the company declares it).

Non-Convertible Debentures, on the other hand, will never be converted into shares (stocks) of the company. Investors who invest in such non-convertible debentures will enjoy a fixed interest rate up to maturity and after that return of principal (exactly like Bank FDs).

Secured and Unsecured Debentures

Now within debentures, there is one category like secured and unsecured debentures. Secured debentures mean companies while borrowing money from you usually along with a promise to repay the interest and principal timely, put up some asset (such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders) as surety for the loan.

Secured means in case of the company goes bankrupt or goes something wrong, the company will sell such assets and repay you the money. Hence, secured debentures are usually safer than unsecured.

In the case of unsecured debentures, if the company goes bankrupt, then you will get the money when all such secured debtors’ amount is paid back. Hence, unsecured debentures are riskier than secured, and also because of such risk they offer a higher interest rate to you than the secured.

Call and Put Option in Debentures

There is one more variant in the case of debentures and they are usually called as Call or Put Option Debentures.

A CALL option means the company has an option to ask the investor to surrender the debenture after a certain period to them. In such a situation, the company will pay back the principal to you.

Usually, companies exercise this option if interest rates go down, and the company can get funds at lower rates from the market. In such a situation, instead of paying you a higher interest rate, companies can exercise this call option and go for a cheaper loan.

On the other hand, a PUT option means that the investor has an option to surrender the debenture if he wants to, and get back his principal.

Suppose if interest rates go up and what you are receiving from your debenture is offering you lesser interest, then you can exercise this option and get back your money to invest somewhere else. A put option gives a lot of flexibility to the investor – if interest rates go up, he can get better rates from the market.

Do remember that such CALL and PUT options are available to investors after holding the debentures for certain periods. Also, companies give you a time period to accept or exercise such options and within that period you have to exercise it.

Taxation of NCD (Non-Convertible Debentures)

# Interest Income

The taxability of interest on NCD will depend on the method of accounting you follow for recognizing your income.

If you are following the cash method of accounting, interest will be taxable as and when the interest is received.

However, under the mercantile method of accounting, interest income on NCD will be taxable as and when interest is accrued and due.

Hence, interest income is treated as “Income from Other Sources” and treated accordingly.

# Short-Term Capital Gain

If you held the debentures for less than a year and sold them in the secondary market, then any such gain from this selling will be taxed according to your tax slab.

# Long-Term Capital Gain

If you hold the listed NCD, (cumulative or annual interest payment), for a period of one year or more, and on selling such NCD if you earn the gain, then such gain will be long-term capital gains (LTCG) chargeable to tax at 12.5% without indexation benefit.

Adani Enterprises 9.9% NCD – Review, Features and Eligibility

Adani Enterprises, the leading firm in the group, has introduced 8,000,000 non-convertible debentures (NCDs) priced at Rs 1,000 each. The company aims to secure an initial amount of Rs 400 crore, while also incorporating a green-shoe option that, if utilized, would enable the firm to raise an additional Rs 400 crore. Consequently, the total size of the issue could reach Rs 800 crore. The NCDs are set to be listed on both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

CARE Ratings has assigned an A+ rating with a positive outlook to the NCDs. The subscription period commenced on September 4 and will conclude on September 17. Investors have the option to choose debentures with maturities ranging from 24 months to 60 months. Interest payments will be made annually, quarterly, or cumulatively, based on the selected series of NCDs.

The company has stated that a minimum of 75% of the funds generated from this issuance will be allocated towards the prepayment or repayment, either partially or fully, of the current debts incurred by our organization, while the remaining amount will be used for general corporate purposes. The allotment of the issue will occur on a first-come, first-served basis.

Adani Enterprises 9.9% NCD – Review, Features and Eligibility

Let us now look into the features of this Adani Enterprises 9.% NCD.

Adani Enterprises 9.9% NCD – Should you invest?

Even though they are secured NCDs and the rating is good, you have to look for certain risks associated with these NCDs. The current rate is not the highest grade (AAA) but it is A+. The rating agency emphasized that a shift in the attitude of promoters towards supporting Adani Enterprises in meeting its substantial capital expenditure needs poses a significant risk to the rating.

Additionally, any considerable divergence from the anticipated free investable cash flows could negatively impact the ratings. Moreover, the rating agency pointed out that in January 2023, Hindenburg Research, a research firm based in the United States, published a report containing multiple allegations against the Adani group. This report triggered a steep decline in the group’s overall market capitalization, thereby limiting the financial flexibility of the group.

Following the report in March 2023, the Supreme Court of India instructed the Securities and Exchange Board of India (SEBI) to initiate regulatory investigations concerning the Adani Group. In response, CARE Ratings assigned a ‘Negative’ outlook to the ratings of Adani Enterprises.

CARE Ratings has observed that, according to the Supreme Court’s ruling dated January 4, 2024, 22 out of 24 regulatory investigations have been finalized, with the remaining investigations expected to be completed within the next two to three months.

“While the investigation is not yet concluded, the impact of the outcome on the group does not appear as an issue of concern. However, any material adverse outcome of the investigations impairing the group’s financial flexibility shall remain a key rating monitorable,” said Care Ratings.

Rating is the biggest concern in this issue as it’s not a top-rated NCD. However, as we are now in a lower interest rate trajectory, I think this NCD looks attractive to those who are ready to take risks. However, do note that if you are in an accumulation phase of your wealth, then choose a cumulative option. However, those who are looking for a certain constant stream of income can opt for a regular interest payout option.

Liquidity is also a concern in such NCDs. Even though they are listed in the secondary market, the volume of trade is thin. Hence, during economic issues or company-specific issues, you may not find any buyers for such NCDs.

I personally hold reservations regarding Non-Convertible Debentures (NCDs) because of the associated risks, which can lead to a significant concentration of risk when investing in a particular company’s bonds. Additionally, factors such as taxation and liquidity further complicate the matter. It is generally more prudent to invest in well-diversified debt mutual funds rather than expose oneself to substantial risks by purchasing NCDs. Ultimately, the decision rests with you, taking into account your individual needs and capacity for risk. Please note that this should not be interpreted as investment advice; it is intended solely for informational purposes regarding NCDs.

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