As the unabated spread of the Covid-19 pandemic places a question mark over the prospects of the India growth story and markets are expected to witness further fatigue, NRIs are delaying their investment decisions.
Though NRIs have less confidence in the Indian markets, a new breed of investment instrument is gaining popularity.
Non-convertible debentures (NCDs) have become the new darling of NRI investors.
Advisers are increasingly recommending this instrument as a safe and gainful investment.
Economic backdrop
India’s economy recorded its steepest contraction in the April-June quarter of the current fiscal year as the deadly coronavirus pandemic spread across the country, stalling economic activity, with dwindling consumption and investment leading to job and income losses.
According to data released by the National Statistical Office (NSO), GDP in the April-June quarter of 2020-21 crashed 23.9% compared with growth of 3.1% in the previous quarter.
Among major economies, India’s contraction was the sharpest.
Economic data points to an uneven recovery and the economy is projected to contract 10.8% year-on-year compared with the 6.1% contraction forecast earlier.
Safer and better?
“In such a situation NRIs usually refrain from investing in India for want of sure-shot opportunities,” said Binoo Nayyar, chief financial officer at TrendRiser Securities, Dubai.
“Fixed deposits (FDs) in banks have traditionally been the most favoured instruments, but the interest rates on them are at a record low of 5-6%. After adjusting for inflation rate, the returns are either zero or negative.”
NCDs offer security and better returns in an uncertain market, he said.
Jojo James, chief executive of Fosbury Wealth Managers, and partner at Tamim Chartered Accountants, UAE, added: “At a time when interest rates on FDs are very low and financial markets are choppy, NRIs should look for better options.
“Non-convertible debentures are relatively safe.”
What is an NCD?
NCDs are loan-linked bonds that cannot be converted into stocks and usually offer higher interest rates than convertible debentures.
The bonds are secured and rated by the rating agencies.
As many as five companies have raised INR8.82bn ($120m; £90m; €101m) through retail issuance of NCDs in the first four months of the current fiscal, according to data released by markets regulator Securities and Exchange Board of India (Sebi).
The funds have been mopped up to strengthen balance sheets, which might have been impacted due to the pandemic, to retire existing debt and to support working capital requirements.
The debts instruments are preferred by corporates, banks and FMCG companies to lower their cost of funds.
As many as a dozen companies; mainly financial service, manufacturing firms and infrastructure service providers, have lined up issuance of NCDs to raise around INR240bn this year, as they expect a recovery in the economy sooner than later.
As the rating agencies have assigned positive ratings for debt instruments issued by most corporates, these NCDs are being viewed as safer investments that offer higher returns.
Companies that have already raised funds through NCDs include Muthoot Mini Financiers and Muthoot Fincorp, Kosamattam Finance, KLM Axiva Finvest and Sakthi Finance.
NCD candidates
The board of Adani Ports and Special Economic Zone has approved a proposal to raise up to INR30bn through issuance of NCDs.
The fund will be raised in one or more tranches.
The debentures to be issued will be listed on BSE and/or National Stock Exchange of India.
State-run Bank of India is also planning to raise INR80bn through the issuance of NCDs.
While state-owned power utility NTPC Limited plans to mobilise about INR150bn through the issuance of bonds.
The company intends to bring in these funds by inviting subscriptions for secured or unsecured, redeemable, taxable or tax-free, cumulative or non-cumulative and NCDs.
Another NCD candidate is Vodafone Idea.
Manappuram Finance announced the allotment of secured rated redeemable non–convertible debentures (NCD) on private placement to mobilise INR1bn.
James suggested other instruments such as exchange traded funds (ETFs) through the portfolio investment schemes, in conformity with Reserve Bank of India guidelines.
