• Notification Date: 01-09-2023
  • Notification No: N/A

NBFCs seek TDS Relook as Demand for Listed NCDs Hit

Non-banking financial companies (NBFCs) are seeking a relook of the move to bring listed non-convertible debentures (NCDs) under the tax deducted at source (TDS) bracket as it has dented the appetite for these instruments. 

“TDS has impacted the sentiments of high net-worth individuals who are investors in these instruments, and they are looking at more tax-efficient routes like the stock market to deploy their funds,” Finance Industry Development Council chairman Umesh Revankar said. 

“While market-linked debentures as product was flourishing earlier, it has come under taxation and the product has taken a hit. It has impacted the demand for these instruments,” agreed Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, a financial advisory firm. 

In the FY24 Budget, the government removed the exemption from the 10% TDS on listed NCDs by omitting clause nine under section 193 of the Income Tax Act. 

NBFCs, which are among the biggest issuers of these securities, in a recent meeting with the Reserve Bank of India (RBI), sought its intervention since the tax is stifling the secondary bond market, said sources. 

NCDs are important instruments for raising funds for NBFCs since many banks are nearing their lending limits to non-bank lenders. At the same time, the RBI has been nudging NBFCs to reduce their dependence on bank borrowings and forced them to tap the bond market. 

Unlike convertible debentures, NCDs cannot be converted into equity. Proceeds from the issue of these securities can be utilised for various purposes, including for lending and repayment, and prepayment of debt. 

Typically, institutional investors like public financial institutions, banks’ provident funds, insurance companies, mutual funds, as well as non-institutional investors like corporates, and scientific and industrial research organisations are authorised to invest in NCDs. Individuals can also invest in these securities. 

“Mutual funds were large subscribers of NCDs in India. However, over the last 3-4 years, the demand for NCDs has been sluggish and very concentrated,” Kishore Lodha, chief financial officer, U GRO Capital, said, adding that in the last 3-4 years, mutual funds have also been staying away from a large part of the markets and focusing only on a select pocket of issuers. 

In such a scenario, the TDS on listed NCDs has impacted demand for these securities from retail investors too. 

“It will impact the retail investors as there was no TDS deduction on returns on investment on listed NDCs before. The corresponding tax is paid at a later stage. Nevertheless, retail investors are slowly getting used to the new norms,” Umesh Mohanan, executive director and chief executive officer, Indel Money, said. 

Listed NCDs provides liquidity to investors and gives the subscriber the flexibility to sell the NCD on exchanges, instead of it being mandatorily redeemed. 

Typically, the yield on these securities ranges from 7-14% depending on the debt rating of the issuer entity. 

Experts feel that the levy of TDS on listed NCD has led to a plethora of operational challenges for both issuers and subscribers. 

The Securities and Exchange Board of India (Sebi) has directed corporates to raise 25% of long-term funds through listed debentures and stipulated a penalty of 0.20% for any shortfall in a block of 3 years. 

Retail investors, especially senior citizens, look at listed debentures as a hassle-free investment option, and tying them with procedural formalities will dissuade them from choosing debentures as an investment option. This can result in corporates not meeting the Sebi criteria and incurring heavy penalty, a spokesperson of a leading NBFC said on the condition of anonymity. 

Debentures are issued for different tenors under different International Securities Identification Number (ISIN) and unlike bank deposits, debentures are tradeable. In such a scenario, corporates are finding it difficult to track the holding as well as interest already paid during the financial year to an investor across various ISINs before each monthly, quarterly, annual interest payment, the spokesperson added. 

Apart for listed NCDs, the government has also classified the nature of returns on market-linked debentures as short-term capital gains, resulting in higher taxation on these investments. This has impacted returns on market-linked debentures too.