Reliance Home Finance 9.40% Non-Convertible Debentures (NCDs) – December 2016 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Demonetisation has resulted in a flood of liquidity in the Indian banking system and nobody is able to decide when to channelise such excess liquidity in a scenario where there is no demand for money for any new project and even for the existing ones. Banks and lending institutions are struggling to find takers for their loans as the prospective borrowers are also struggling to see any light at the end of this long and uncertain tunnel. But, as we know all bad times end with good times, this period of bad time will also pass away very soon.

Amidst this uncertainty, Reliance Home Finance Limited, a subsidiary of ADAG group’s Reliance Capital Limited, is coming out with its issue of non-convertible debentures (NCDs) from today. The company is offering interest rates in the range of 8.90% to 9.40% to the individual investors, for an investment period of 3 to 15 years.

The company plans to raise Rs. 3,500 crore in this issue and it is scheduled to close on January 6, 2017.

Here are some of the salient features of this issue:

Size & Objective of the Issue – The company plans to raise Rs. 3,500 crore from this issue, including the green shoe option of Rs. 2,500 crore. The company plans to use at least 75% of the issue proceeds for its lending and financing activities and to repay interest and principal of its existing borrowings and a maximum of 25% of the issue proceeds for other general corporate purposes.

Coupon Rate & Tenor of the Issue – The issue will carry a coupon rate of 8.90% p.a. for a period of 3 years (36 months), 9.05% p.a. for 5 years (60 months), 9.15% p.a. for 10 years (120 months) and 9.40% p.a. for 15 years (180 months). Interest will be paid on an annual basis and there is no option to get interest on a monthly or cumulative basis.

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Call Option – It should be noted here that RHFL will have the right to call back Series IV NCDs at the end of 10 years from the date of issuance. The company will primarily do so if interest rates fall from here and it is able to raise money cheaply 10 years from now. However, if the company decides not to exercise its call option, then it will pay an additional 0.25% to the investors over and above the annual rate of 9.40% i.e. 9.65% after 10 years from its issue date.

Premature Withdrawal, Put Option – Investors in these NCDs will have no right to surrender these bonds back to the company for premature redemption as there is no ‘Put’ option embedded with these NCDs. However, if taken in demat form, the investors can always sell these NCDs on the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).

Categories of Investors & Allocation Ratio – The investors have been classified in the following four categories and each category will have the below mentioned percentage fixed in the allotment:

Category I – Qualified Institutional Bidders (QIBs) – 30% of the issue i.e. Rs. 1,050 crore

Category II – Non-Institutional Investors (NIIs) – 10% of the issue i.e. Rs. 350 crore

Category III – High Net Worth Individuals (HNIs) including HUFs – 30% of the issue is reserved i.e. Rs. 1,050 crore

Category IV – Resident Indian Individuals including HUFs – 30% of the issue is reserved i.e. Rs. 1,050 crore

Allotment on First-Come First-Served (FCFS) Basis – Subject to the allocation ratio, allotment will be made on a first-come first-served basis, as well as on a date priority basis i.e. on the date of oversubscription, the allotment will be made on a proportionate basis to all the applicants of that day on which it gets oversubscribed.

NRIs Not Allowed – Non-Resident Indians (NRIs), foreign nationals and qualified foreign investors (QFIs) among others are not eligible to invest in this issue.

Credit Rating & Nature of NCDs – CARE and Brickwork Ratings have rated the ‘Secured’ NCDs of this issue as ‘AA+’ with a ‘Stable’ outlook. ‘AA+’ rated debt instruments are considered to be highly safe from credit default point of view. Series I, II and III NCDs are ‘Secured’ in nature for which the investors will carry a right on certain assets of RHFL in case of any major financial trouble for the company. However, Series IV NCDs are ‘Unsecured’ in nature and have been rated ‘AA’ by these credit rating agencies.

To compensate the investors of Unsecured NCDs, RHFL is offering a marginally higher rate of interest i.e. 0.25% additional coupon rate, over and above 9.15% for 10 years with Secured NCDs.

Listing – These NCDs will be listed on both the stock exchanges i.e. NSE as well as BSE. The listing will take place within 12 working days from the date the issue gets closed.

Demat, Physical Application – Investors can apply for these NCDs either in demat form or physical or certificate form as it is not mandatory to have a demat account to invest in these NCDs.

TDS – Interest income earned is taxable with these NCDs and the investors are required to pay tax on the interest income as per their respective tax slabs. TDS @ 10% will be deducted if these NCDs are held in physical/certificate form and annual interest income is more than Rs. 5,000. NCDs held in demat mode will not attract any TDS.

Should you invest in Reliance Home Finance Limited (RHFL) NCDs?

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Note: Figures are in Rs. Crore, except per share data & percentage figures

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With the entry of so many big and small players, housing finance space has become very competitive now and Reliance Home Finance has not been a very prominent name in this space. The company itself knows it and that is why it does not focus on low margin home loans segment. Rather it focuses on loan against property (LAP) and construction finance and that too, primarily to that segment of borrowers who do not get loans easily from big and rather conservative players like HDFC, LIC Housing Finance etc.

With demonetisation, it is widely expected that real estate industry will have a really tough time for a period of 6-12 months at least. A considerable slowdown in this market will have a really bad impact on the real estate finance companies, especially companies like Reliance Home Finance which are focusing on self-employed borrowers and miscellaneous segments of our real estate market.

However, with dwindling fixed income investment options and volatile interest rate scenario, investors are finding 9%+ interest rate options to be attractive. Investors, who are not in the 20-30% tax bracket and/or those who want to remain invested in these NCDs for a medium to long term period, can consider investing in these NCDs. Investors, who seek listing gains or capital appreciation due to an expected fall in interest rates going forward, should avoid these NCDs as I think there is a very limited scope of any such outcome.

Application Form – Reliance Home Finance NCDs

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in Reliance Home Finance Limited (RHFL) NCDs, you can reach us at +91-9811797407

49 thoughts on “Reliance Home Finance 9.40% Non-Convertible Debentures (NCDs) – December 2016 Issue”

  1. Day 2 (December 23) Subscription Figures:

    Category I – Rs. 862.52 crore as against Rs. 1,050 crore reserved – 0.82 times
    Category II – Rs. 378.03 crore as against Rs. 350 crore reserved – 1.08 times
    Category III – Rs. 1,089.29 crore as against Rs. 1,050 crore reserved – 1.04 times
    Category IV – Rs. 795.04 crore as against Rs. 1,050 crore reserved – 0.76 times
    Total Subscription – Rs. 3,124.87 crore as against total issue size of Rs. 3,500 crore – 0.89 times

    The issue got closed on Friday, December 23.

  2. Highly risky in my opinion. The effects of demonetisation on the economy, and especially in the real estate market is still unknown.

    Also there will be huge thrust by the government to pursue the Benami properties. Black money hoarders and corrupt people will find it more difficult to buy properties.

    Real estate market is going to go for a tough time in 2017-18. So even housing finance companies are going to get rocked.

    Stay Away !! You have been warned !

  3. Sir,
    Is the issue open today for all categories or only category 1 & 4
    Since 2 & 3 is already subscribed on Day 1 can they still apply
    for it today?
    If so,how will the allotment take place for those two categories?

    1. Hi Vanita,
      Issue was open on Friday for all the categories, including category 2 & 3. As Category IV (retail investors) did not get subscribed to the full extent, whatever was left would get allocated to the category III, II & I investors, in that order.

  4. Day 1 (December 22) Subscription Figures:

    Category I – Rs. 822.51 crore as against Rs. 1,050 crore reserved – 0.78 times
    Category II – Rs. 377.59 crore as against Rs. 350 crore reserved – 1.08 times
    Category III – Rs. 1,093.48 crore as against Rs. 1,050 crore reserved – 1.04 times
    Category IV – Rs. 719.34 crore as against Rs. 1,050 crore reserved – 069 times
    Total Subscription – Rs. 3,012.91 crore as against total issue size of Rs. 3,500 crore – 0.86 times

    The issue is getting closed today.

    1. Seems retail portion is not totally subscribed still, per figures in BSE site. So issue should be open for Monday 26-Dec also.. pls confirm.

      1. Hi Irfan,
        You’ll get to know the allotment status within 12 working days from the issue closing date. However, if your application is successfully submitted, you should get 100% allotment as the retail category was not fully subscribed.

    1. Hi Mukund,
      If you have a demat account, then you can apply online or with the help of your broker. If not, then download the form from the link pasted above in the post, duly fill it and mail us at skukreja@investitude.co.in, we will do the needful for you. For any kind of help, you may contact us at +91-9811797407

  5. Mr. Shiv, thank you for the excellent write-up.
    Kindly explain the tax implications of CAPITAL GAINS/LOSSES on sale of these:
    1) Reliance NCDs &
    2) TAX FREE BONDS &
    3) Debt/Liquid Funds.

    Which is better & more tax friendly?
    Please clarify/elaborate & oblige.

    1. Thanks S.K. !!
      1. Listed bonds/NCDs get taxed at flat 10% if held for more than 1 year. If sold before completion of 1 year, then it is taxed as per your tax slab. Debt funds are taxed at 20% with indexation if held for more than 3 years. If sold before completion of 3 years, then debt funds are taxed as per your tax slab.
      2. If you can manage your investments in bonds/NCDs yourself or through your financial advisor, then bonds/NCDs are better investments and tax friendly too.

      1. Mr. Shiv, thank you for responding. If I use ITR-2, under Capital Gains Tab where exactly are the above Gains/Losses to be reported? Can short term losses on TAX FREE BONDS/NCDS be carried forward & adjusted against OTHER SHORT TERM GAINS for next 7-8 years like in Equity shares.

        1. Thanks S.K. !!
          Please get in touch with your tax advisor for such queries or wait for our article on this, I’ll try to cover it in an article for you and other readers.

          1. Hi Shiv,
            Recently, my 3year tenured NCDs in Muthoot got matured and the proceeds credited to my Bank acct. Difference between Hold value and Sold value (bought back by company) is negative, so will this come under capital loss ? I have shown interest earned under other income in my ITR last 3 years. Please advise.

            1. Hi Karuna,
              There will be no capital gain or loss if you bought these NCDs from the company itself. You just need to show interest income for the holding period. For further clarity, please consult your tax advisor.

          2. Awaiting the promised article please.
            In current scenario, where should a retired person invest, keeping Tax-Efficiency, convenience, liquidity, pre-maturity possibility? My possible alternatives are:
            1) GOI 8% Bonds,
            2) POST OFFICE NSC
            3) Kisan Vikas Patra
            4) Tax Free Bonds
            5) Equity MF’s
            6) Debt MF’s.

            Have already holdings of Tax Free Bonds & FD’s.

            Thank you.

  6. For secured bonds (up to 10 years), there is NO call, NO put option. Call option applies ONLY to UNSECURED 15-year bond only? Verify.

  7. Dear Shiv,
    Rising NPAs & falling Profit Margins – is this not a concern ? How are such products getting AA+ rating ? What is the basis of this rating ?
    Thanks

    1. Hi TCB,
      It all depends on the management how they manage things at work. NPAs and Profit Margins are manageable in the housing finance business depending on the segment you cater to. Though I am not a great fan of ADAG group companies, but Reliance Capital is still somewhat better than other group companies. Still, it seems they don’t give much importance to this business or are a late entrant. Rating agencies have their own criteria for assigning ratings to such issues, but there also I have no trust and I too feel ‘AA+’ rating is probably not justified here.

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