Let us have a look at Non Convertible Debentures (NCDs) and how good this investment option is? NCDs are fixed income securities. These debentures do not have option of getting converted into equities on maturity. They offer better returns, normally 1-2 per cent higher, than bank deposits.

As I said you can expect 1-2% higher returns than bank deposits but NCDs are not as secure as Bank Deposits. Bank deposits up to Rs 1 lakh are secured under the government sponsored deposit insurance & credit guarantee corporation (DICGC). So it is very important to look for certain facts such as credit rating, operating sector of the company and very important Debt-Equity and Interest coverage ratio of the borrowers.

Now let us explore some of these deposits schemes in details. To start with we’ll have a look at Tata Motors. Tata motors is India’s largest automobile company engaged in manufacturing, designing and marketing of passenger and commercial vehicles. Reported net profit of Tata Motors was Rs. 1,016.6 on March 31, 2009. It is their second deposit scheme where they are expecting to raise Rs. 1,500 crore from market. This scheme was running with two options A and B as non-cumulative and cumulative deposit respectively. Minimum investment was Rs. 20,000 with additional deposits in multiples of Rs. 10,000.

· Scheme A Non-Cumulative Deposit Plan which has minimum investment of Rs 20,000. Interest rate is 8.0% for first two years and from third year onward it is 8.75%.

· Scheme B Cumulative Deposit Plan with effective yield of ~ 8.578% and maturity value of Rs. 23,433 for 2 years. Whereas 3 years with 8.75% interest rate we get effective yield of ~9.9%

Next in queue is Shriram Transport Finance’s (STF) Non-Convertible Debentures. This is very different like you have different kinds of vehicles for different kinds of transport needs this offering has tried to cater to all kinds of investors. STF has given 5 different options and I don’t find any reason why many investors will not look at it as a good investment option.

· Option I is for people requiring regular income semi-annually. Minimum application of Rs. 10,000 and interest rate of 11% is expected to give yield of 11.30% on redemption. Redemption is staggered in ratio of 40%, 40% and 20% at the end of 36, 48 and 60 months respectively.

· Option II is with annual payment of interest and has the same redemption scheme as option I, only difference is interest rate, which is 11.25% for senior citizen.

· Option III offers interest rate of 11.03% which is compounded quarterly. It has effective yield of 11.50% on redemption. One more twist with this option is that it has Put and Call option which can be exercised at the end of 48 months. Entire maturity amount will be paid at the end of 60 months.

· Option IV is again with put and call option similar to option III but the interest rate is 11% without compounding and effective yield is also 11%. Annual interest will be given and redemption is allowed at the end of maturity.

· Last but not the least here is something for our short term investors as well. Investors who are thinking of investing for only 3 years (not that short). Interest rate is 10.75% without any put or call option. Redemption is bullet payment at the end of 36 months i.e., 3 years.

All the above options have tenure of 60 months except for option V which is having 36 months tenure.

Third and last one that I’m going to discuss is L & T Finance (LTF) a wholly-owned subsidiary of engineering and construction giant Larsen & Toubro. LTF has revenue of Rs. 830.28 crore and an asset base of Rs. 5,218.64 crore as on March 31, 2009. LTF was incorporated as Non-Banking Finance Company in 1994 and since then it is consistently profitable. This issue is LTF’s first ever public offer of secured redeemable Non-Convertible Debentures. Issue aggregates to Rs 500 crore i.e., 50, 00,000 NCDs with face value of Rs 1,000 each.

LTF has offered 5 different options; all the options are available for retail investors, non institutional investors (NIIs) and qualified institutional buyers (QIB). In all the options interest payments are re-invested. Option I was with interest rate of 9.51% (2.3775% quarterly) minimum application is Rs 10,000 for retail investor and 1, 01,000 for NIIs & QIBs. This option will provide quarterly interest payments and with effective yield of 9.85 on redemption. Option IIwas having interest rate of 9.62% and an effective yield of 9.85% on redemption. Minimum application amount is same as option I. Interest payment is half yearly and tenure is of 60 months. Option III is cumulative deposit scheme with same minimum application and is for 88 months. Interest rate is 9.95% (compounded annually) expected effective yield is 9.95%. Option IV is long term deposit scheme with the tenure of 10 yrs (120 Months), interest payment is half yearly at the rate of 10.24% and with expected effective yield of 10.50%.

That is it; now I can see those dollars in your eyes but hold on its not all that ends with it. What about the safety of your money? Don’t I care for safety of your money? So here is how you can decide about safety of these deposit schemes. There are many credit rating agencies which provide quality rating based on different important parameters such as liquidity, stability, creditworthiness and timely servicing of debt obligation. Agencies such as FITCH, CARE rate these schemes based on above parameters. These ratings are good enough to trust on and there is very little difference between the ratings given by different rating agencies for a same scheme.

If we compare these debentures with Bank Deposits, Post Office Schemes (MIS, NSC, KVP) the safety is medium for Tata Motors where as formers will be highly safe. In the past Tata Motors borrowed huge money to purchase Jaguar Land Rover and after that an additional loan to keep company running all this resulted into high debt to equity ratio which is 10:1 against the industry average of 1:2. However, this not the reason to write off Tata Motors deposit scheme completely as the company has got decent history, strong parental backup from Tata Group and is an established auto player in Indian automobile industry.

Our second in the list was Shriram Transport Finance which has got ratings as AA+ and AA by CARE and FITCH respectively. The issue is secured by charge on the assets of the company for the people who say you better return my money with all interest or else I’ll sell whatever you have to get my money back. Hold on I know there are some people who like to hold collars of somebody else if they do not get the money from the person to whom they have given it. For such people STF has appointed IDBI Trusteeship as trustee for these debentures. For taking care of your money company has created a Debenture Redemption Reserve for redemption of NCDs. Besides, issue is also listed on NSE so that investors can buy and sell it in secondary markets.

L & T finance has been assigned ‘CARE AA+’ and ‘LAA+’ ratings by rating agencies CARE and ICRA limited respectively. ICRA’s LAA+ rating indicates high credit quality and low credit risk. CARE AA+ is for high safety for timely servicing of debt obligations. LTF’s Debt-Equity Ratio is 5.43 (08-09) and interest coverage ratio is 1.28. What? You don’t know how to interpret them okay let me help you out well both are not encouraging. We can accept interest coverage ratio above 1.5 and hence it is a matter of concern. LTF is in the business of lending and borrowing so for it Debt-Equity Ratio can be high but after the issue it can soar to 6.68. LTF has zero exposure to real estate, thus, is protected against any credit default. Also, company is maintaining Capital to Risk Assets Ratio (CRAR) of 16.41% as on March 31, 2009 where as RBI has prescribed 10%.

So that was it I hope this will make NCDs as one of our investment option in near future. I do recommend you to think of this as an investment option to have a diversified portfolio. But this is my personal opinion and your investment will be based on your needs.