Should you redeem your Tata Capital NCD? ::Business Line

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The put-call option allows investors to redeem the debentures after 3 years of issue and also allows the company to pay back investors after the same period.

After three years of lucrative interest rates of 11-12 per cent, Tata Capital non-convertible debentures is now opening up for a put-call option according to the terms at the times of its issue. The put-call option allows investors to redeem the debentures after three years of issue and also allows the company to offer to pay back investors after the period.

But this is not all. The company will also lower the interest rates of its four debenture options for the remaining two years if you choose to stay invested. This is being done by modifying the debenture terms now, through a special resolution.

Interest rates on the monthly and quarterly option will be reduced to 9.75 per cent for the remaining term from 11 per cent and 11.25 per cent respectively paid earlier. For the annual interest payout and cumulative options, interest rate will be reduced to 10.5 per cent from 12 per cent.

Investors who want to redeem can do so before June 5. For the quarterly option alone, the redemption date opens from September 2 and is open till December 3. While the rate change is effective March 5 for all schemes, for the quarterly option the change is effective September 6.

Now as a retail investor, should you opt for this redemption or continue with reduced rates? Investors who value safety over returns may best redeem their debentures.

For one, some of the top-rated NBFCs such as HDFC offer similar returns, especially for non-cumulative options. Banks too, offer as much or slightly lower rates of anywhere between 9.25-9.75 per cent.

Investors can therefore consider switching to these safer avenues. Tata Capital compensated investors with a 12 per cent rate given its marginally higher risk profile.

The modified rates do not appear to provide that cushion. Besides, Tata Capital's NCD will expire in two years; whereas you can lock into bank or other deposits at similar rates for three or more years now.

Given that interest rates may not hold up for long now, you can start investing in the other deposit options right away if you have surplus, as you will receive the redemption proceeds only after three months. If not, you can switch after the money is received.