CIBIL Credit Score – Negative Factors and Ways to Improve your Score

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

Many of you must have checked your CIBIL credit score sometime in the past and for some of you it must have got a surprise either positively or negatively. Some of you might have been caught unaware of a credit card account running in your name with annual charges being levied year after year. Some of you might have undergone for a loan settlement with the lender which could have impacted your score quite negatively.

But to your surprise, some of you could have found your credit score to be quite high, despite defaulting a couple of times. This is due to some unique but scientific methodologies being adopted by CIBIL to calculate your score.

Factors that negatively affect Credit Score:

1. Late payments or defaults in the past: Your payment history has a significant impact on your credit score. So, if you have missed payments on any of the existing loans over the past couple of years, then the credit score would get negatively affected as it indicates you are facing difficulties in servicing the existing obligations.

2. High utilization of credit limits: You must remain quite careful while using the credit limits available on your credit cards. A higher and higher utilization pattern against the available credit limits is an indication of an increased repayment burden and may negatively affect your credit score. Lower outstanding balances getting reflected in your credit card statements improve this score.

3. Higher percentage of Credit Cards or Personal Loans (i.e. Unsecured Loans): A higher number of unsecured loans coupled with a high utilization would also affect the score in a negative way because of the fact that these unsecured loans carry a very high rate of interest as compared to secured loans like home loans or car loans and result in larger payments and higher defaults.

4. Behaving Credit Hungry: If you are behaving “Credit Hungry” (i.e. in an urgent need of money) and have applied for new credit facilities with a large number of lenders, then it is going to affect your score negatively and make the lenders more cautious while evaluating your application for a fresh loan.

Can your CIBIL Credit Score be improved? If yes, how?

As I mentioned in my earlier post, it is like a CAT examination. Like you can always improve your CAT score by appearing for the exam again, your CIBIL credit score can also be improved, but not overnight. If you have taken a 20-year home loan which is just a couple of years old and you’ve defaulted on your EMIs 3-4 times since the beginning, then it will probably take you at least 2-3 years or probably more than that with regular EMI payments to improve your score. You will have to maintain the greatest of financial discipline in order to secure a better credit treatment in the future. Here is how it can be done.

Measures to improve your Credit Score:

1. Pay your loan EMIs regularly in a timely manner to maintain a clean credit history: Try to keep a diligent track of your EMIs in case you are running more than one loan.

2. It is highly advisable to make full payments on your credit card instead of just the minimum payment. In case it becomes very difficult to pay the bill in full, at least make the minimum payment without fail.

It takes you a longer time to build your credit history with a loan as compared to a credit card as these loans are usually for a longer tenure whereas a regular payment of your credit card bills can help you start building a good credit score as you keep on making the regular payments. A credit card debt is categorized as a revolving credit and it helps in building a good credit score faster if the payments are regular.

3. Do not apply for an extra credit card unnecessarily when your bank’s relationship manager approaches you to get one and actually you do not require it. Applying for an extra card or a loan without any requirement would mean more credit exposure and reaching near the card’s credit limit would result in a lower credit score.

4. If you have been issued a credit card but you have not used it very frequently or the utilize credit limit has been very low, then this would affect your credit score in a positive way as unused credit cards actually imply that you are financially secure.

5. You should use special incomes like bonus or a monetary gift or some other source of savings for the prepayment of some of your existing debt. Early repayment of debt also helps in improving your score.

6. Avoid becoming a joint account holder or a guarantor in a loan or a credit card facility as any default would lower the quality of your credit score.

7. Avoid going in for a settlement or “write-off” of your loan accounts as it implies that you have not been able to pay the past dues. Keeping the credit history clean improves your credit score.

8. You should keep reviewing your credit history on a regular basis to ensure that the credit report accurately reflects your current financial status.

At the end of the day, common sense should dictate what you do with your financial life and good financial habits along with awareness of credit scores will help you build a good credit history and a good credit score.

Check Your CIBIL Credit Score & Credit Information Report Online

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

This is the 3rd post in a series of posts covering CIBIL Credit Information Report and CIBIL Credit Score. You can access the earlier two posts here:

CIBIL TransUnion credit score – role in a loan application process

CIBIL Credit Information Report

By now, you must have become well versed with the contents of a Credit Information Report and the significance of a credit score. Now it is time to know how you can access your report and know what your credit score is.

You can access your CIBIL TransUnion Score along with the full Credit Information Report for a nominal fee of Rs. 470. You are just required to fill a request form with some basic details like Name, Address, Date of Birth, Gender, Contact Details etc. and keep the self-attested copies of your Identity Proof and Address Proof ready.

You can see the application here.

Online payments can be made either through Net Banking platform of a bank or through a debit card/credit card/cash card. The net banking facility is available with 33 banks as of now. You will get a unique CIBIL registration ID and transaction ID as a confirmation on successful completion of your online payment. After the payment is made, you need to answer 3-5 questions about any of your loans or credit cards to authenticate your application. You’ll then be required to provide the soft copies of your identity proof and address proof.

If your application gets authenticated, you’ll receive your credit score and CIR in your e-mail in about 2-4 days. However, if the authentication fails, you need to take a printout of the receipt for online payment and mail it to the below mentioned CIBIL address along with your proofs.

Consumer Relations: Credit Information Bureau (India) Limited,
Hoechst House, 6th Floor, 193 Backbay Reclamation,
Nariman Point, Mumbai 400 021, India.
Tel.: 022 61404300, email: info@cibil.com

Offline Application

If you decide against going online, then you will have to take a printout of the application form, duly fill it and get a Demand Draft (DD) made worth Rs. 470. Again attach the copies of your identity and address proofs along and send it to the above mentioned address.

Also, if you wish to purchase only your Credit Information Report, then you can do so by having a DD of just Rs. 154 and follow the above mentioned process. But, in that case, the process would be offline only because there is no provision to get it online without asking for your credit score.

You also need to sign the form in order to confirm your requests. Note that the address proof (except passport) – bank statement, telephone bill, electricity bill or credit card statement should not be more than 3 months old and should be in your name matching with your name in your loan/credit card account or on your PAN card (if you do not have any loan or credit card).
Like many of us undergo physical health check-ups, I think one should get his or her credit score checked at least once a year. It will keep you aware of your credit health and make you take necessary steps to correct it whenever required.

So what are you waiting for now? Just visit the CIBIL website and get your score checked. I’m sure there will be many surprises in store for many of us. Just share your score and experiences here with us so that we have a platform to understand these things in more detail.

A look at some key terms before the RBI announcement tomorrow

This post is written by Shiv Kukreja

RBI is in a dilemma again. On the one hand, inflation is not coming under control, rise in the prices of vegetables, cereals, milk and oil have been making headlines in newspapers for the last many months, on the other hand, India’s economic growth is slowing down at a faster pace than most experts expected.

In fact nobody expected India’s GDP growth rate to fall so dramatically. Many research houses and brokerages have already cut their FY 2012-13 forecasts for India’s GDP growth. Last time, the consensus was that RBI should cut rates, and this time, largely the consensus seems to be that RBI won’t cut any rates.

As a common man many of us wonder what all these measures are and how these measure actually make an impact in an inflationary environment and also on the growth of an economy. Here is my effort to make you understand this jargon and its impact.

 

Cash Reserve Ratio (CRR): Scheduled Commercial Banks (SCBs or simply banks) in India are required to maintain an average cash balance with RBI, as a proportion of their total deposits. E.g; If CRR is 5%, Banks are required to deposit the first Rs. 5 with the RBI out of their total deposits of Rs. 100 and then use the remaining Rs. 95 for their investment and lending purposes. Banks are mandated to deposit this amount with RBI on a fortnightly basis. CRR is 4.75% at present.

 

Purpose and Impact: Say, if your after-tax monthly income is Rs. 100K and you are required to keep Rs. 5K out of it with your father, then your remaining disposable income is Rs. 95K. RBI plays the role of a father here. CRR is a tool used by the RBI to control the liquidity in the system. So when there is excess money floating around, RBI will raise the CRR to suck out the excess money. On the other hand, if there is a credit crunch, RBI cuts the CRR to release money into the system.

Statutory Liquidity ratio (SLR)

It is the proportion of deposits that SCBs are required to maintain in cash or gold or government approved securities. After keeping the required amount for CRR and SLR, the banks are free to use the remaining deposits for their lending purposes.

Purpose & Impact: SLR, more or less, plays a similar role as does CRR. SLR is determined and maintained by the RBI in order to restrict the expansion of bank credit and like CRR.

Repo Rate (or Repurchase Rate)

This is the rate at which SCBs borrow money from the RBI for a short period of time by selling their securities or financial assets to the RBI with an agreement to repurchase it at a future date at a predetermined price. Repo rate is 8% at present. From banks’ point of view, Repo arrangement with the RBI is like a common man taking a short term loan from a bank.

Purpose & Impact: Higher Repo Rate keeps the demand for funds by the banks in check. Repo rate is the single biggest factor that makes banks raise or lower lending rates on their home loans, car loans etc. You must have read in the newspapers that banks start raising their interest rates within a few days after the RBI raises the Repo rate. Banks do that as their own cost of money rises because of RBI’s actions. They need to maintain their margins in order to keep their profitability intact and show growth to their shareholders.

RBI purposefully raises Repo rate when it wants to discourage Banks to borrow from it and do further lending. This action reduces money flow in the system. RBI raised the Repo Rate by 3.25% (from 4.75% in March 2010 to 8% in December 2011) which made the banks borrow funds at a much higher rate and in turn hiked their lending rates also. An increase in interest rates also makes it more expensive for firms to finance investment. As a result, higher interest rates normally curtail investment. If consumption and investment fall, so does aggregate demand. Lower aggregate demand results in lower resource utilisation. When resource utilisation is low, prices and wages usually rise at a more modest rate.

Reverse Repo Rate

This is the rate at which SCBs deposit their excess money with the RBI for a short period of time. As the name suggests, it is the reverse of a repo (repurchase) agreement. Reverse Repo rate is 7% at present. From banks’ point of view, Reverse Repo arrangement with the RBI is like a common man making a short term deposit with a bank.

Purpose & Impact: RBI raises Reverse Repo rate when it wants to reduce liquidity out of the banking system. Banks would get a higher return on their money parked with the RBI. It also makes banks to offer higher rate of interest on the deposits made by the general public.

Liquidity Adjustment Facility (LAF)

This is a facility extended by the RBI under which banks can borrow money from the RBI by pledging their holding of government securities. Basically LAF enables liquidity management on a day to day basis.

Purpose & Impact: LAF is an important tool of monetary policy and enables RBI to transmit interest rate signals to the market.

 

Overall Impact of RBI measures:

1) Due to Change in Interest Rates: Overall interest rate environment affects the demand for goods and services. Higher interest rates make it more attractive to save and lead to a reduction in household consumption. It also makes it more expensive for firms to finance investment. If both consumption and investment fall, it leads to a fall in aggregate demand and resource utilization. It results in prices and wages rise at a more modest rate.

2) On Inflation Expectations: Due to reasons mentioned above like lower household consumption and lower corporate investments, a tighter monetary policy should result in lower inflation as it reduces the aggregate demand

3) On Exchange Rates: Normally, an increase in the interest rates should result in a strengthening of the Indian rupee. This is because higher interest rates make Indian assets more attractive from a foreign investor’s point of view. The result is a capital inflow and increased demand for rupee, which strengthens the exchange rate.

The consensus this time is that the near drought condition has made RBI’s situation trickier than before and they are between a rock and a hard place. The policy announcement tomorrow will be interesting, and if they make any rate changes that will be even more interesting and even a little surprising.

How to calculate Yield to Maturity of a Bond or NCD

This post is written by Shiv Kukreja

A few days back TCB, one of the regular visitors on OneMint, asked me about the process to calculate YTM of a bond. I wanted to tell him the whole process while replying but that would have been too much for the comments section and therefore I decided to write a post on it.

What is Yield to Maturity and how to calculate it?

Yield to Maturity (or YTM) is the annualised rate of return that an investor earns on a fixed income instrument such as bond or debenture, if the investor purchases the bond today and holds it until maturity. This yield incorporates the yield earned in the form of interest payments and the present value of the principal amount (or face value) of the bond.

In other words, it is the discount rate which equates the present value of coupon payments and maturity amount equal to the market price of the bond. The Yield to Maturity is actually the Internal Rate of Return (IRR) on a bond.

Market Price of the Bond = Present Value of Coupon Payments + Present Value of Maturity Amount of the Bond

Real Example: I’ll take the real case of 9.95% SBI 15-year bonds to present the process to calculate the YTM. Consider the below mentioned data of SBI bonds for the calculation:

Face Value: Rs. 10000
Maturity Amount: Rs. 10000
Tenure: 15 Years
Allotment Date: March 16, 2011
Maturity Date: March 16, 2026
Coupon/Interest: 9.95% p.a. payable annually (Rs. 995 on the Face Value of Rs. 10000)
Interest Payment Date: April 2nd every year
Market Price: Rs. 10788.56 (July 23, 2012)
Remaining Tenure: 13 Years and 236 Days (or approx. 13.65 Years)
YTM: To Be Calculated

YTM is the discount rate in percentage which is going to make the present value of Rs. 995 payable every year on April 2nd and the present value of Rs. 10000 payable on March 16, 2026 equal to the market price of Rs. 10788.56.

In equation terms:

Rs. 10788.56 = Rs. 995/(1+YTM)^0.65 + Rs. 995/(1+YTM)^1.65 + Rs. 995/(1+YTM)^2.65 + Rs. 995/(1+YTM)^3.65 + Rs. 995/(1+YTM)^4.65 + Rs. 995/(1+YTM)^5.65 + Rs. 995/(1+YTM)^6.65 + Rs. 995/(1+YTM)^7.65 + Rs. 995/(1+YTM)^8.65 + Rs. 995/(1+YTM)^9.65 + Rs. 995/(1+YTM)^10.65 + Rs. 995/(1+YTM)^11.65 + Rs. 995/(1+YTM)^12.65 + Rs. 10995/(1+YTM)^13.65.

The discount rate which makes LHS = RHS is the YTM of the bond. Now, we will have to use the “Trial and Error” method to determine this YTM.

There is an approximation formula to calculate YTM very close to the correct YTM:

Approximate YTM = [(Coupon Payment + ((Face Value – Price)/Years to Maturity)] / (Face Value + Price)/2

How to calculate YTM using a financial calculator?

We can also use a financial calculator or an excel sheet to calculate YTMs. Here is the link to one of the financial calculators:

http://vindeep.com/Corporate/BondYTMCalculator.aspx

You just need to feed your data in the boxes provided on the left hand side of this calculator and it will calculate YTM for you after just couple of clicks. You can observe here that you cannot make changes in the boxes on the right hand side and these boxes calculate the required figures on their own.

Maturity Date: 16/03/2026
Coupon: 9.95%
Coupon Payment Frequency: Annual
Maturity Value of bond: 100
Interest Accrual Start Date: 16/03/2012
Clean Price: 104.3656
Settlement Date: 23/07/2012
Ex-Dividend: No
Day Count Basis: Actual/Actual

“Settlement Date” is the date on which you are calculating the YTM. In our case, it is July 23, 2012 or July 25, 2012 (a couple of working days after today’s date) and click on “Calculate Bond Yield (YTM)” after filling the first five boxes of the financial calculator. “Dirty Price” should be equal to the “Market Price” of the bond but we cannot change it on our own. So, in order to change it, we need to change the “Clean Price”.

To calculate the correct clean price, we need to deduct the “Accrued Interest” of Rs. 3.52 from the market price Rs. 107.89. The resultant figure is Rs. 104.37 and when we put it in the sixth box and again click Calculate Bond Yield, we get the correct dirty price of Rs. 107.89. ‘Ex-Dividend’ box should remain ‘No’ and “Day Count Basis” should be “Actual/Actual”. Now we get the correct YTM as 9.3509%.

How to calculate YTM using excel?

We can calculate the required YTM using the ‘Yield’ function in an excel sheet also. As we did it using financial calculator, we just need to feed the data here in a similar way. Start by typing “=Yield” (without the quotes) and then enter the following parameters:

Settlement: “23/07/2012” (must be in quotes) [Note: This assumes that your Excel is setup to take date format in DD/MM/YYYY, if it doesn’t work, try MM/DD/YYYY)]
Maturity: “16/03/2026” (must be in quotes)
Rate: 9.95% (or 0.0995)
Pr: 104.3656 (Clean Price)
Redemption: 100 (Maturity Amount)
Frequency: 1 (Interest Payable Annually)
Basis: 1 (Actual Days since Last Interest Payment/Actual Days in a Year)

You can check that the data we have entered here is quite similar to the data we entered using financial calculator. Actually the financial calculator uses excel itself in the background to calculate YTM. Here we get the YTM as 9.3571%, a bit different than we calculated above. That is probably due to the rounding-off differences of “Accrued Interest” while working on the financial calculator.

You can similarly calculate “Yield to Call” and “Yield to Put” also, which are regular features of corporate bonds issued in the developed markets. But, here in India, call/put options are not used extensively so I’ll try to write a post on them whenever the need arises. If I missed something here or there is something which is incorrect or require explanation, please leave a comment.

Shriram Transport Finance Corporation NCD Issue

This article is written by Shiv Kukreja

Shriram Transport Finance Corporation will be launching the first public issue of Non-Convertible Debentures (NCDs) this financial year from July 26th. The issue size is Rs. 600 crore including a green-shoe option of Rs. 300 crore. The company plans to use the proceeds for various financing activities including lending and investments, to repay existing loans, for capital expenditures and other working capital requirements. The issue closes on August 10, 2012.

The bonds offer an annual coupon rate of 10.25% and 10.50% for a period of 36 months and 60 months respectively. What the company has done to make these NCDs attractive for the individual investors is that they will be offered an additional 0.90% p.a. making it an annual coupon rate of 11.15% and 11.40% respectively. This means even if an individual investor buys it from the secondary markets they are going to get 11.15% or 11.40%.

Many of you must have remembered that the company came with a similar kind of issue last year also. Bonds issued last year are currently yielding 11.07% under the 60 months reserved individual option and 12.23% under the 36 months reserved individual option. So, going by these yields, 11.40% and 11.15% is actually attractive for the individual investors.

The investors will have the option to get the interest either paid annually or at the end of the tenure along with the principal. Under the cumulative interest option, retail investors will get Rs. 1,716.15 after 5 years and Rs. 1,373.19 after 3 years for every Rs. 1,000 invested. For all other investors, these amounts stand at Rs. 1,647.90 and Rs. 1,340.10 respectively.

The interest earned would be taxable but the company will not deduct any TDS on it as is the case with all of the listed NCDs. The issue keeps a minimum investment requirement of Rs. 10,000 (or 10 bonds of face value Rs. 1,000) which seems reasonable from the small retail investors’ point of view.

These bonds will offer reasonable liquidity to the investors as they are going to list on both the stock exchanges – NSE and BSE. Unlike last year, the retail investors will have the option to apply these bonds in physical form also. All the remaining investors will have to subscribe these bonds compulsorily in demat form only.

40% of the issue is reserved for the Reserved Individual Category i.e. for the individual investors investing up to Rs. 5 lakhs and another 40% of the issue is reserved for the Non-Reserved Individual Category i.e. for the individual investors investing above Rs. 5 lakhs. 10% of the issue is reserved for the institutional investors and the remaining 10% is for the non-institutional investors. NRIs and foreign nationals among others are not eligible to invest in this issue.

Shriram Transport NCD July 2012
Shriram Transport NCD July 2012

A slew of NCD issues had hit the markets last year when companies like Shriram Transport, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, Religare Finvest, India Infoline Investment Services etc. came with approximately ten such issues. I must tell you, except Shriram Transport NCDs, all other NCDs listed at a discount and that too at quite a deep discount of 5-8% in some cases. Many of them have still not been able to recover from those losses. They must be yielding higher than 13% even now.

But Shriram group is a quite stable group and the issue has been rated ‘AA/Stable’ by CRISIL and ‘AA+’ by CARE suggesting that these bonds are reasonably safe to invest. Unlike last year, there are no put/call options available either to the investors or to the company.

 

Tax Free Bonds – Mid Year Update

This post is written by Shiv Kukreja.

The first quarter of calendar Yyear 2012 saw a big number of public sector undertakings (PSUs) issuing tax-free bonds. NHAI, PFC, IRFC, HUDCO and REC – they all came within a span of 70-75 days and took away approximately Rs. 28,000 Crores from the markets.

These bonds were quite attractive and offered very good tax-free returns of over 8%. mutual funds, insurance companies, other financial institutions, corporates, FIIs, NRIs, trusts etc. – all participated in these issues and many of these issues got oversubscribed on the first day itself.

Retail investors were slow to begin with but they also participated in these issues but in a wrong manner and at a wrong time. Over a period of last 30-45 days, I’ve observed their attractiveness increasing and a large number of my clients asking me more details about these bonds and investing in them.

NHAI was the first one to offer an attractive rate of tax-free return of 8.30%. I still remember I sent quite a good number of emails to all my clients and personally made calls to a few clients in an effort to make them understand the terms of the NHAI bonds issue and why it made sense to invest in these bonds at the time of its public offering itself.

But as always, clients took their own time to understand its benefits and when these bonds actually listed at a premium of 4% on the exchanges, they remained quiet because they had nobody to blame for this notional loss or opportunity lost but themselves. If I had made no efforts in informing them then they would have caught me for not putting proactive efforts. 🙂

NHAI bonds came into the limelight when Indian Railways Finance Corporation (IRFC) came out with its bond issue and due to a rosy picture shown to the investors by the broker community, investors flocked to apply for IRFC bonds. Brokers even provided funding to their clients to apply in this issue. But I knew IRFC bonds were not as attractive as the NHAI bonds were because of its “step-down interest” feature i.e. the rate of interest gets reduced to 8.10% if a buyer purchases these bonds from the original allottee in the secondary markets.

During the subscription period, IRFC bonds issue got a huge response in an expectation of a bumper listing like the NHAI issue had. But that did not materialize and IRFC bonds gave only 1-1.5% listing gains and that too were taken away by the brokers who funded the investment. HUDCO tax free bonds issue also opened for subscription on the same date i.e. January 27th but due to its lower rating of AA+ and not so heard of name, it could not be fully subscribed and listed at a significant discount of 4-5%.

REC was the last to come up with its AAA-rated tax-free bond issue in the first week of March and got a reasonable response also. But again its listing was poor with 2-3% discount due to a huge number of sellers and a very few investors showing any interest to buy. There has been no such issue hitting the street since then, despite of the fact that Finance Minister has doubled the quota for these bonds to Rs. 60,000 crore in this year’s budget.

What makes these bonds attractive?

Higher effective after-tax returns: Suppose you fall in 30% tax bracket and have invested Rs. 5,00,000 in a fixed deposit with HDFC Bank for 5 Years earning 9.25% p.a. interest. The after-tax effective rate of interest on this FD would be 6.39% (9.25%*(1-0.309)). You can also look at it as tax-free equivalent rate of interest. On the other hand, these tax-free bonds offer you 8.30% interest, which is equivalent to 12.01% effective before-tax rate of interest. So, you can either compare 9.25% with 12.01% or 6.39% with 8.30%. This comparison makes tax-free bonds a clear winner as far as the rate of interest is concerned. In actual terms, you’ll end up having Rs. 31959 as the interest with your FD after one year as compared to Rs. 41500 with tax-free bonds, a difference of Rs. 9541 every year.

Scope of capital appreciation: Then comes the capital appreciation factor. We all know India is struggling with a high inflation rate and the interest rates are ruling on a higher side. But there is a strong possibility that one or two years down the line both the inflation as well as the interest rates might cool down. Also, whenever the interest rates come down, bond prices go up. In that scenario, there is no scope for FDs to result in any capital appreciation because your FDs are not trade-able and you cannot transfer the title of these FDs in the market. At the same time, capital appreciation is possible with tax-free bonds as and when the inflation and interest rates cool down. These bonds are tradeable and freely transferable to any of the interested prospective buyer on the exchanges where these bonds are listed.

Liquidity: One more attractive feature of these bonds is their liquidity. When you break your FD before the tenure gets completed, the bank either levies a premature withdrawal penalty or gives the applicable rate of interest for the period you hold the FD for. Tax-Free Bonds score over FDs in this department also. You can sell these bonds in the secondary market whenever you want, given there is a buyer for these bonds. Till date the liquidity has not been a big negative factor for all of these issues, though at times the buyers have benefited quite a lot due to a huge number of sellers selling around listing time without thinking that they were selling these bonds at unreasonable prices.

TDS on FDs: Fourth factor which goes against FDs is that your FDs allow the banks to cut tax whenever they pay you more than Rs. 10,000 interest in a year. Needless to say tax-free bonds attract no tax so no scope of any TDS.

So after the first six months of this calendar year are gone, what is the current state of these bonds? – This table will tell you: (click to enlarge)

Since listing, some wise investors have bought in these bonds citing an opportunity due to weaker hands (retail investors) selling to encash their investments. These investors have made some decent returns since then. You can observe two kind of returns from the table – one is “Returns Over Issue Price” which shows the returns earned if somebody had applied for these bonds during the initial offer period. The other one is “Returns Since Listing” which shows the returns earned if somebody had bought these bonds from the secondary markets (stock exchanges where these bonds are listed like NSE or BSE).

HUDCO bonds have given 11.17% returns since listing in less than 4 months i.e. an annualized return of over 34%. Similarly, REC bonds have given 8.88% returns in just over 3 months i.e. an annualized return of over 30%. But, it would be highly unfair to expect a similar performance from these issues going forward. I would say it would be great if these bonds deliver some 10-12% returns over next one to two years, if interest rates come down.

What investors should do now?

It depends on what kind of investor you are, the reasons for which you want to invest in these bonds and the overall interest rate and inflation scenario in the country going forward. If you are in a 30% or 20% tax bracket, want to invest in these bonds from a long-term point of view i.e. more than one year, and believe that the inflation as well as the interest rates are headed lower, then you should definitely go for these bonds. You need to focus on their “Coupons” (interest rates on these issues) as well as the “Yield to Maturity” (or YTM). Coupon is the interest payment you are going to get every year on the “Interest Payment Date” over the issue price.

If you want to invest in these bonds for a very long period of time, say till maturity, then you need to focus only on the YTMs because you are going to get precisely this much yield on an annual basis till maturity considering the price you are paying over the issue price (premium in all these cases) and the remaining coupon payments.

If you want to invest in these bonds from a short-term point of view i.e. less than a year, then your returns will depend on the inflation and the interest rates over that period of time. If the interest rates fall more than expected, then your returns will be higher than the YTM and vice-versa.

I think people in the 10% tax bracket can also consider investing in these bonds considering there is no scope to have any capital appreciation in fixed deposits or post office schemes etc. but at the same time these bonds yield less to these investors or to those who need not pay any tax at all.

Given the stickiness of inflation and interest rates, the returns given by these bonds are not bad from any angle. How these bonds perform over the next year or two will depend on the inflation numbers, our fiscal deficit, current account deficit, interest rates scenario and most importantly how these companies themselves perform. I hope to see more such opportunities striking our doors in the next 8-9 odd months.

Dematerialization Process – Special Situations

This post is written by Shiv Kukreja

“Converting my physical share certificates and mutual fund investments into a dematerialised form has been a huge pain”. This is the experience which many of my clients have shared with me. The reasons are many – lack of knowledge with the clients about how, where and whom to approach, complicated procedures to do it, very little knowledge with the people who work for broking companies or DPs and most importantly very little interest shown by the sales-driven broking industry. We are giving it a shot to simplify the process a bit for you.

How to dematerialise your physical asset holdings

Dematerialisation is the process by which physical certificates of one’s financial investments like shares or mutual funds can be converted into an electronic form. An investor, who wants to get the securities dematerialised, needs to have a demat account with any of the depository participant (DP) like HDFC Securities, ICICI Securities, India Infoline etc.

The investor needs to surrender the certificate(s) to the DP along with the duly filled Dematerialisation Request Form (DRF), who then sends the securities to the concerned Registrar & Transfer (R&T) agent. To avoid any misuse of the share certificates, the investor must ensure that they are defaced by marking “Surrendered for Dematerialisation” on the face of the certificates. After receiving the certificates, R&T agent registers either NSDL or CDSL as the holder and the  client as the beneficial owner of these securities, if the certificates are found to be in order.

On receiving intimation from the R&T agent, NSDL or CDSL credit the securities in the depository account of the client with the DP and inform the client accordingly. It should not take more than 30 days from the date of submission of a demat request to get the holdings dematerialised.

Dematerialisation request is subject to a DP scrutiny and can be rejected in case:

* A single DRF is used to dematerialise securities of more than one company.
* A single DRF is used to dematerialise securities having different ISINs of the same company.
* If the material information on the security certificates is not readable.
* Part of the certificates pertaining to a DRF are either “locked-in” or “partly paid-up”.

Here are some of the common situations I’ve seen over the years.

Transfer cum Demat Form – Transfer of physical securities certificate from one name to another requires the investor to forward the certificate along with the duly stamped and executed “Transfer Deed” and “Transfer cum Dematerialisation” form. While sending the certificates for transfer, the investor must ensure that the transfer duty has been paid, the stamps are cancelled and the transfer deed is complete in all respects like the transferor’s signature, broker’s stamp, SEBI registration/code no., full address of the transferee, everything is there.

Death of a joint holder – Transmission cum Demat Form – In the event of death of a joint holder(s), the other joint holder(s) can get the name of the deceased joint holder(s) deleted from the physical certificate and simultaneously get the securities dematerialised by using the “Transmission cum Demat” form.

Death of a single holder/investor – Transmission in case of nomination – In the event of death of a single beneficial owner (or investor/client), the nominee(s) can get the securities dematerialised by using the “Transmission cum Demat” form along with a notarised copy of the death certificate. These securities will then automatically be transferred in the name(s) of the nominee(s).

Death of a single holder/investor – Transmission in case there is no nomination – In the event of death of a single beneficial owner without a nomination, the legal heir(s) or legal representative(s) can get the securities dematerialised by using the “Transmission cum Demat” form, a notarised copy of the death certificate and any of the following notarised documents – succession certificate or copy of probated will or letter of administration.

Difference in the sequence of holding – Transposition cum Demat Form – The names of the holders on a certificate should exactly match with the names in the demat account and in the same sequence. If the sequence of names on a certificate is different than the sequence in the demat account, then the securities can be dematerialised by using “Transposition cum Dematerialisation” form. e.g., If A and B have a joint demat account in the same sequence and some share certificates are held in the sequence of B and A, then the shares can be dematerialised in the same demat account using the “Transposition cum Demat” form.

Theft/Loss of a certificate – A complaint needs to be lodged with the local police station and a copy of the FIR should be obtained and the event should immediately be reported to the R&T agent along with the certificate no./folio no./distinctive nos. to “Stop Transfer” of such certificate(s). The client should then request for a fresh issue of duplicate certificate by sending both these documents physically to the R&T agent.

Change in the name consequent upon marriage/divorce – The securities certificate along with a copy of marriage certificate/decree of divorce and fresh specimen signature, duly attested by the competent authorities should be forwarded to the R&T agent. The client is also required to open a new demat account with the changed name and then send the new certificate for dematerialisation.

These are some of the most common situations that the clients face. If you’ve any personal special situation/experience regarding dematerialisation of your physical holdings, then please do share with us.