On January 7, 2012 Tata Capital Limited NCD - Option 3 (Non Convertible Debenture) traded at an average price of Rs 1134 on the BSE. This debenture was issued in March 2009, had a face value of Rs 1000 and carried an annual coupon of 12%. At a price of 1134, the IRR for this debenture worked out to be 10.2%
Tata Capital Limited had come out with this NCD issue in February 2009. The debentures were offering a coupon between 11-12% p.a depending on the payment option chosen by the investors. The original issue size was Rs 500 cr with an option to retain an oversubscription up to Rs 1000 crs. With equity markets in bad shape and a nice yield of 12% , this bond to be issued by the house of Tatas created a buzz in the market and the issue was oversubscribed and received Rs 2300 crs.
One important clause of the debentures which a lot of investors miss to read and the financial advisers fail to stress is the availability of the put and the call option. Under this option, after some scheduled time period as mentioned in the document, the issuer has the right to call the debentures and the investor has the right to sell (put) his debentures and take his money back. And both these situations would ideally happen in a case where the market interest rates fluctuated either in the interest of the issuer or in the interest of the debenture holder.
In Tata Capital NCD, the document stated that the put / call option could be exercised after a period of 3 years (in one series it was 3.5 years) from the date of the issue. This announcement made by the company on Saturday mentions that the company has decided to exercise the call option and the directors of the company have approved of the variation in the terms of the NCD. The coupon rate has been reduced across different series. For Option III discussed in the opening paragraph, the coupon has been reduced from 12% per annum to 10.50 % for the rest of the maturity period which is 2 years and 2 months from now.That is a sharp reduction and I concluded that market participants will factor this new development . I quickly calculated that for the IRR to remain at 10.2%, the price of the debenture should come down to Rs 1108 which is 26 bucks lower than the Saturday's closing price of 1134.
To my surprise, this announcement had no bearing today on the price of the Tata Capital NCD and the Option III NCD is still trading at Rs 1134. At this price, the IRR with the reduced coupon rate is 8.81% which is lower than the bank deposit rate for an FD of the same maturity. (Axis Bank is offering 9.3% interest for an FD with a maturity term of 2 years and 2 months). Any rational investor should ideally withdraw his money from this NCD and put it in a bank fixed deposit.
I always thought that bond market participants are more nimble compared to the participants in the equity markets.
What explains this inefficiency? The announcement is out there on the exchanges and there is no information asymmetry. The debenture size of 1500 crs is large and unlikely to escape the attention. Taxation can't explain the inefficiency. These debentures are taxable at the same rate as bank FDs.
Is there anything I am missing here ?