DHFL, or Dewan Housing Finance Limited, is coming out with its issue of Non-Convertible Debentures (NCDs) from the coming Tuesday i.e. May 22, 2018. These NCDs will carry coupon rates in the range of 8.56% to 9.10%, resulting in an effective yield of 8.90% to 9.10% for the retail individual investors.
DHFL plans to raise Rs. 12,000 crore from this issue, including the green shoe option of Rs. 9,000 crore. The issue will remain open for 2 weeks and is scheduled to close on June 4, unless the company decides to foreclose it.
Before we take a decision whether to invest in this issue or not, let us first check the salient features of this issue.
Size & Objective of the Issue – Base size of the issue is Rs. 3,000 crore, with an option to retain oversubscription of an additional Rs. 9,000 crore, making the total issue size to be Rs. 12,000 crore. The company plans to use the issue proceeds for its lending and financing activities, to repay interest and principal of its existing borrowings and other general corporate purposes.
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) – 25% of the issue i.e. Rs. 3,000 crore
Category II – Non-Institutional Investors (NIIs) – 10% of the issue i.e. Rs. 1,200 crore
Category III – High Net Worth Individuals (HNIs) investing more than Rs. 10 lakh, including HUFs – 30% of the issue is reserved i.e. Rs. 3,600 crore
Category IV – Resident Indian Individuals investing up to Rs. 10 lakh, including HUFs – 35% of the issue is reserved i.e. Rs. 4,200 crore
Coupon Rate & Tenor of the Issue – The issue will carry coupon rate of 8.90% p.a. for a period of 3 years, 9% p.a. for 5 years and 7 years and 9.10% p.a. for 10 years. These rates are applicable for annual interest rate payment only. Monthly interest payment option is available only with 3 years and 5 years tenors, and coupon rates for these periods have been fixed at 8.56% p.a. and 8.65% p.a. respectively.
Additional 0.10% Coupon for Senior Citizens – Category III and Category IV investors, who are senior citizens on the deemed date of allotment, will be eligible for an additional 0.10% interest rate provided they hold these NCDs on the record date for the purpose of interest payment.
One-Time Additional Incentive on Maturity – Category III and Category IV initial allottees will be paid a one-time additional incentive of 0.50% for the 5-year annual as well monthly interest payment options, 0.70% for the 7-year option and 1% for the 10-year option. This incentive will be paid at the time of maturity and only to those investors who hold these NCDs throughout their respective duration. No such incentive will be paid with the 3-year interest payment options.
MIBOR Linked Floating Interest Rate – Like its previous issue, DHFL has decided to offer an option to have floating interest rate with these NCDs. The specified spread will be 2.16% p.a. over and above the benchmark MIBOR for all the categories of investors. Benchmark MIBOR will be computed on an annualized basis, based on the Reference Overnight MIBOR published by Financial Benchmark India Pvt. Ltd. (FBIL), and it will be reset once every year in the second and third year.
Allotment on First Come First Served 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 this issue as ‘AAA’ with a ‘Stable’ outlook. Moreover, these NCDs will be ‘Secured’ in nature.
Listing, Premature Withdrawal & Put/Call Option – These NCDs will get listed on both the national exchanges i.e. Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). The listing will take place within 12 working days after the issue gets closed. Though there is no option of a premature redemption, the investors can always sell these NCDs on the stock exchanges. There is no option either with the company to ‘Call’ these NCDs prematurely.
Demat Not Mandatory – Demat account is not mandatory to invest in these NCDs as the investors will have the option to apply for these NCDs in physical or certificate form as well.
TDS – Though the interest income would be taxable with these bonds, NCDs taken in a demat form will not attract any TDS. The investor will have to pay tax on the interest income while filing his/her income tax return.
Should you invest in DHFL NCDs?
Bond yields have been rising for the last 12-18 months, and that too, at an unusually fast speed. Benchmark 10-year government bond yield is currently trading very close to 7.90% levels, while it touched a low of around 6.10% during demonetization period.
In August 2016, when the bond yields were trading between 6.70% to 7%, DHFL issued its NCDs with coupon rates ranging between 8.83% to 9.30% and the issue got oversubscribed to the tune of 4.70 times on the first day itself. Encouraged by such an extraordinary response, DHFL came out with its second tranche of a bigger size a few days later, and that too got oversubscribed 1.26 times on Day 1.
Going by that experience, I think this issue should also get oversubscribed much before its official closing date. But, despite of the fact that the bond yields have risen by around 2% since demonetization, it is somewhat disappointing to have coupon rates on offer even lower than its August 2016 issues.
The current NDA government is about to complete its 4-year term and I expect both equity markets as well as bond markets to exhibit a lot of volatility in the next 1-2 years. Given such a scenario, I think it is time the passive or risk-averse investors should park their money in safer investment instruments. These NCDs too are relatively safer carrying ‘AAA’ rating, except for the fact that DHFL is a private issuer.
Coupon rates of 8.56% to 9.10% do not attract me much, despite the issue being rated ‘AAA’. I would rather prefer to invest in debt mutual funds, hoping bond yields to fall once the economy stabilizes post next year’s elections. However, investors, who are not required to pay any tax on their annual taxable income or who fall in the 10% tax bracket, can consider investing in these NCDs for a period of 3 years or max 5 years. As expressed earlier as well, I personally avoid longer term investment periods with private companies, so would advise my clients to avoid longer period investments in such NCDs.
Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. To invest in these NCDs, bidding of your application form or any further info, you may contact us at +919811797407