Tata FD & NCD: What's best for you?

MUMBAI: With equity markets in a state of turmoil, the old-fashioned but reliable fixed income instruments have regained their standing with

retail investors. More so after a series of rate cuts by central bankers, as investors are now keen to lock in their money in high-yield instruments before interest rates decline further.

At such a time, there are two instruments on offer from Tata Group entities in the form of a fixed deposit (FD) from Tata Motors and a secured non-convertible debenture (NCD) from Tata Capital. Here are some of the pointers to ponder over before you decide.

Issuer

Tata Motors is a leading passenger and commercial vehicle manufacturer. The acquisition of Jaguar Land Rover in 2008 has catapulted its ranking many notches higher. To finance the deal, the company has taken up huge debt obligations. In these recessionary times, the company is out to raise money to refinance the bridge loans and hence, the fixed deposit on offer.

On the other hand, Tata Capital is a wholly-owned subsidiary of Tata Sons and was incorporated as Primal Investment & Finance in 1991. The name was changed to Tata Capital from May 8, 2007, and it is now functioning as a non-banking financial company. The company is raising money through issue of NCDs to carry out various financing activities including lending and investments.

The offerings

The FD offered by Tata Motors is available for one, two or three years. The rate of interest ranges between 10-11%. Senior citizens, shareholders and employees are entitled to an additional 0.5%. Tata Capital NCD, on the other hand, is available with a tenure of five years.

Factors to remember

A comparison of returns makes the NCD a clear winner over the FD. Also, the fixed deposit interest is subject to tax deducted at source (TDS). As NCDs are issued in the demat form and to be listed on stock exchange, there is no TDS.

Given the downtrend in the auto sector, there is surely a risk element involved in FDs, at least in the short term, as it is a non-secured offering. On the other hand, Tata Capital is in a highly competitive non- banking finance business. The company has a limited timeframe of operations compared to Tata Motors. The FDs are issued in physical certificate mode. However, NCDs are available in demat form.

Though the NCD tenure is of 5 years, it is still comparable with FD as there is an embedded call-put option at the end of 36 months or 42 months, as the case may be. Premature withdrawal of FD is at the discretion of the company. On the other hand, though the NCDs are listed on the stock exchange, the liquidity is not assured, given the past experience of not-so-efficient corporate bond market in India.