Adani Enterprises 9.9% NCD Review, Features & Compliance

Adani Enterprises offers 8 series of NCDs with various tenor options of 24, 36 and 60 months. These NCDs offer effective yields between 9.25% and 9.90%.

Adani Enterprises Limited, the flagship company of the Adani Group, launched its initial public offering of secured non-convertible debentures (NCDs) on September 4 and is currently seeing strong interest from retail investors.

What are bonds?

Bonds are nothing more than you lending your money to a company. In return, the company promises you an interest rate and a return of the principal within a specified time period. So what is the difference between bonds and notes?

In the case of India, the difference is as follows: bonds and bonds are the same. However, there are only slight differences in the reasons why companies borrow from us (investors). Generally, bonds are for long-term corporate borrowing. However, bonds are for short-term corporate needs.

Types of Bonds

Now let us understand the different types of bonds.

Convertible and Non-Convertible Bonds

Convertible bonds mean that after the specified time these bonds are converted into shares (stocks) of the company. Until this call, you will benefit from the fixed stated coupon (interest rate) in such bonds. After that, your earnings depend on the increase in the price of the stock or the dividend income you receive (if the company declares it).

On the other hand, Non-Convertible Debentures will never be converted into shares (stocks) of the company. Investors investing in such non-convertible debentures will enjoy a fixed rate of interest till maturity and return of principal thereafter (just like Bank FDs).

Secured and Unsecured Bonds

Now within bonds, there is a category called secured and unsecured bonds. Secured bonds mean that when companies borrow money from you, they usually put up some asset as collateral for the loan, along with a promise to repay interest and principal on time (these assets are free from any other liens other than those specifically agreed to by the bondholders).

Secured means that if the company goes bankrupt or something goes wrong, the company will sell those assets and pay you back the money. Therefore, secured bonds are generally safer than unsecured bonds.

In unsecured bonds, if the company goes bankrupt, you get the money when the amount of all the secured debtors is repaid. Therefore, unsecured bonds are riskier than secured ones and also, due to this risk, they offer you a higher interest rate than secured ones.

Call and Put Options on Bonds

There is one more variant on bonds and these are generally called Call or Put Option Bonds.

A CALL option means that the company has the option to ask the investor to deliver the bond to it after a certain period of time, in which case the company will pay back the principal to you.

Usually companies exercise this option when interest rates fall and the company can get funds from the market at lower rates. In such a case, 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 the option to deliver the bond and get his principal back if he wishes.

If interest rates rise, say, and you get less interest on your bond, you can exercise the option and take your money back to invest elsewhere. A put option gives the investor a lot of flexibility – if interest rates rise, they can get better rates than the market.

Note that such CALL and PUT options are offered to investors after they hold the bonds for a certain period of time. Also, companies give you a time frame to accept or exercise such options and you have to exercise the options within that time frame.

Taxation of NCD (Non-Convertible Debentures)

# Interest Income

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

If you follow the cash method of accounting, interest will be taxed when the interest is received.

However, as per commercial method of accounting, interest income from NCD will be subject to tax when interest accrues and matures.

Therefore, interest income is considered as “Income from Other Sources” and is accounted for accordingly.

# Short Term Capital Gain

If you held the bonds for less than a year and sold them on the secondary market, the gain from that sale will be taxed according to your tax bracket.

# Long Term Capital Gain

If you hold the listed NCD (cumulative or annual interest payment) for a period of one year or more and you get gain on selling such NCD, such gain will be long term capital gain (LTCG) taxable at 12.5% ​​without indexation benefit.

Adani Enterprises 9.9% NCD – Review, Features & Eligibility

Adani Enterprises, the group’s flagship firm, has issued 8,000,000 non-convertible debentures (NCDs) at a price of Rs 1,000 each. The company aims to raise an initial amount of Rs 400 crore while also including a green shoe option that, if exercised, will enable the firm to raise an additional Rs 400 crore. Ultimately, the total amount issued could touch Rs 800 crore. The NCDs are planned to be listed on both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

CARE Ratings has given A+ rating to NCDs with a positive outlook. The subscription period began on September 4 and will end on September 17. Investors have the option to choose bonds with maturities ranging from 24 months to 60 months. Interest payments will be made annually, quarterly or cumulatively, depending on the NCD series selected.

The Company has stated that at least 75% of the funds raised from this issue will be allocated for partial or full prepayment or repayment of existing debts incurred by our organization, while the remaining amount will be used for general corporate purposes. The allocation of the issue will be on a first come, first served basis.

Adani Enterprises 9.9% NCD – Review, Features & Eligibility

Now let us look at the features of Adani Enterprises 9.% NCD.

Sherry	I	II	III	IV*	V	Sixth	Seventh	VIII
Interest Payment Frequency	Annual	cumulative	Quarterly	Annual	cumulative	Quarterly	Annual	cumulative
Tenor	24 Months	24 Months	36 Months	36 Months	36 Months	60 Months	60 Months	60 Months
Coupon for NCD Holders of All Categories (% annual)	9.25%	None	9.32%	9.65%	None	9.56%	9.90%	None
Effective Return (% annual) for NCD Holders of All Categories	9.25%	9.25%	9.65%	9.65%	9.65%	9.90%	9.89%	9.90%
Repayment Amount on Maturity for NCD Holders of All Categories (?/NCD)	?1,000	?1,193.56	?1,000	?1,000	? 1,318.34	?1,000	?1,000	?1,603.62
Maturity/Redemption Date (From the Allocated Allocation Date)	24 Months	24 Months	36 Months	36 Months	36 Months	60 Months	60 Months	60 Months
Put and Call Option	Not applicable
Face Value/Issuance Price of NCDs (?/NCD)	?1,000
Minimum Application size and thereafter in multiples of NCD	£10,000 (10 NCD) and multiples of £1,000 (1 NCD) thereafter.
Interest Payment Method	Through various modes available
Nature of Indebtedness	Trustworthy

Adani Enterprises 9.9% NCD – Should you invest?

While these are secured NCDs and the rating is good, you need to look for certain risks associated with these NCDs. The current rating is not the highest rating (AAA), but A+. The rating agency highlighted that a change in promoters’ attitude towards supporting Adani Enterprises to meet its significant capital expenditure needs poses a significant risk to the rating.

Additionally, a significant deviation from expected free investable cash flows could negatively impact the ratings. Furthermore, the rating agency noted that in January 2023, Hindenburg Research, a US-based research firm, published a report containing multiple allegations against the Adani group. This report led to a sharp decline in the group’s overall market value, thereby limiting the group’s financial flexibility.

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

CARE Ratings noted that as per the Supreme Court’s order dated January 4, 2024, 22 out of 24 regulatory investigations have been completed, while the remaining investigations are expected to be completed in the next two to three months.

“While the investigation is not yet concluded, the impact of the outcome on the group does not appear to be a matter of concern. However, any material adverse outcome of the investigations that impairs the financial resilience of the group will remain an important ratings issue to monitor,” Care Ratings said.

The biggest concern here is the rating as it is not the highest rated NCD. However, since we are currently on a lower interest rate trajectory, I think this NCD looks attractive to those who are ready to take risks. However, if you are in the accumulation phase of your wealth, then go for a cumulative option. However, those looking for a fixed income stream can opt for the regular interest payment option.

Liquidity is also a concern with such NCDs. Even if they are listed in the secondary market, the trading volume is low. Therefore, during times of economic problems or company-specific issues, you may not find any buyers for such NCDs.

Personally, I have reservations about Non-Convertible Debentures (NCDs) because of the associated risks that can lead to significant concentration of risk when investing in the bonds of a particular company. In addition, factors such as taxation and liquidity complicate the matter further. Generally, it is more prudent to invest in well-diversified debt mutual funds rather than exposing yourself to significant risks by purchasing NCDs. Ultimately, the decision is yours, taking into account your individual needs and risk capacity. Please note that this should not be construed as investment advice; it is for informational purposes only regarding NCDs.

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