Shriram Transport Finance 11.75% NCDs – October 2013 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

Shriram Transport Finance Company Limited (STFCL) will be launching its public issue of non-convertible debentures (NCDs) from October 7th i.e. next Monday. The company plans to raise Rs. 500 crore with this issue, including a green-shoe option of Rs. 250 crore.

This is the second such public issue of this financial year from STFC, as the company raised Rs. 750 crore from its first issue in July and the issue got preclosed in just seven days time on July 24th. The current issue will get closed in a couple of weeks time on October 21st, if it does not get preclosed this time again or extended by the company beyond this date.

Shriram Transport Finance offered 10.90% per annum for 36 months and 11.15% per annum for 60 months in its last issue to the individual investors. This time the rates are 35 basis points (or 0.35%) higher at 11.25% per annum for 36 months and 11.50% per annum for 60 months. The company did not offer 84 months option in its first issue, which is there in its current issue. But, there is no monthly interest option this time.

Before it starts getting repetitive again, here you have the table having the details about the tenors and the interest rate options.

As you can check from the table above, there is an additional incentive of 0.50% p.a. with 36 months option, 0.75% p.a. with 60 months option and 1% p.a. with 84 months option. Unlike tax-free bonds, this additional incentive is available to the individual investors irrespective of the size of their investment amount.

The company is offering its highest rate of interest @ 11.75% p.a. for an investment period of 84 months, which is a very long period for me to stay invested with a private company. Personally, I would avoid 84 months option.

Categories of Investors – The investors have been classified in the following four categories and the individual investors fall in Category III as well as Category IV.

  • Category I – Institutional Investors
  • Category II – Non-Institutional Investors
  • Category III – High Net-Worth Individuals, including Hindu Undivided Families (HUFs)
  • Category IV – Retail Individual Investors, including Hindu Undivided Families (HUFs)

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

Allocation Ratio – 50% of the issue is reserved for the Retail Individual Investors (RIIs) i.e. the individual investors investing up to Rs. 5 lakhs and 30% of the issue is reserved for the High Net-Worth Individual Investors (HNIs) i.e. 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 (NIIs). The allotment will be made on a “first come first serve” basis.

Minimum Investment – Like last time, the company has decided to keep the minimum investment requirement at Rs. 10,000 again i.e. 10 bonds of face value Rs. 1,000 each.

Listing – STFC will get these bonds listed on the National Stock Exchange (NSE) as well as the Bombay Stock Exchange (BSE). Investors can apply for these bonds either in physical form or in demat form, at their own discretion.

Allotment and subsequent listing both are happening super fast these days as we have seen it in the case of REC tax-free bonds. The company will get the NCDs allotted and listed within 9 working days from the date of closure of the issue.

Rating & Nature of the NCDs – CRISIL has rated these NCDs as ‘AA/Stable’ and CARE has assigned a rating of ‘AA+’ to this issue. Moreover, these NCDs are ‘Secured’ by a first charge on an identified immovable property and specified future receivables of the company.

Taxability & TDS – The interest earned on these NCDs will be taxable as per the tax slab of the investors. TDS will be applicable if the NCDs are taken in the physical form and the interest amount exceeds Rs. 5,000 in a financial year. But, if you take these NCDs in your demat account, the company will not deduct any TDS from the interest income.

Interest on Application Money & Refund – Investors will get interest on their application money @ 9% p.a., from the date of investment till the deemed date of allotment, and @ 4% p.a. on the amount liable to be refunded.

Interest Payment Date & Record Date – STFC will make its first interest payment on April 1, 2014 and then on April 1st every year. The record date will be 15 days prior to every interest payment date.

Performance of NCDs issued in July – It is not surprising for me to see all of the NCDs, issued in its first issue in July, to trade below the face value of Rs. 1,000. The reason being the interest rates have risen since then.

STFC-NV, 36 months annual interest option, last traded at Rs. 985 and STFC-NW, 60 months annual interest option, last traded at Rs. 980.10 as on September 27, 2013. Allotment date of these NCDs was August 1, 2013 and it has been almost two months since then. So, the yield on these NCDs must be ruling around the coupon rates offered by the company in the current issue.

IIFL NCDs Issue vs. STFC NCDs Issue vs. HUDCO Tax-Free Bonds

If some of the investors were comfortable investing with the just concluded IIFL NCDs but somehow missed it, then I think they can consider investing in this issue. My personal opinion is that the business model of Shriram Transport Finance is better than the business model of India Infoline Finance Limited (IIFL) and probably its credit rating also suggests that.

But, I would still say that one should explore the already listed NCDs yielding 13-14% with a maturity period of 1-2 years. I think, with fixed deposits (FDs) or NCDs issued by private companies, the shorter the tenure of your investment is, the better it is.

As explained many times earlier, I think the investors falling in the higher tax brackets should opt for tax-free bonds rather than these taxable NCDs. So, personally I would go for HUDCO tax-free bonds or the upcoming IIFCL tax-free bonds rather than these STFC NCDs.

If you are thinking that I have missed to quote the financial of the company in this post, then you are right, but it is intentional. I did that exercise in my July STFC NCDs post and I don’t want to do that again as those were its latest annual results.

Link to Download the Application Form of Shriram Transport Finance NCDs

Buffett’s six criteria for business acquisition

I’ve been reading all of Warren Buffett’s letter to shareholders these days, and beginning with the 1982 letter, Buffett lays out five simple criteria for buying businesses or stocks.

This appears for the next few years, and I think presents a useful guide to retail investors to evaluate stocks as well.

Here are the six points from Buffett’s ’82 letter


We prefer:

        (1) large purchases (at least $5 million of after-tax 

        (2) demonstrated consistent earning power (future 
            projections are of little interest to us, nor are 
            “turn-around” situations),

        (3) businesses earning good returns on equity while 
            employing little or no debt,

        (4) management in place (we can’t supply it),

        (5) simple businesses (if there’s lots of technology, we 
            won’t understand it),

        (6) an offering price (we don’t want to waste our time or 
            that of the seller by talking, even preliminarily, 
            about a transaction when price is unknown).

The second point is of interest to investors as a way of identifying stocks that can be potential purchases. I have bought several potential turnaround stocks in the past, and if the company actually does turn around then it is a great bet but you usually have to wait for a few years to get the benefit.
I feel that if you own a turnaround company then what you’re really looking for is for the stock to grow three or four times at least else the risk is just not worth the return.

I say this because you see a number of opportunities with companies that are making good profits and double in price when bought low enough that you don’t want to have that low an expectation with a turnaround situation.

Getting back to companies with consistent earning power, you can look at the past record of the company for a number of years and see if the revenues, cash flows, and profits have increased or not, and that can be an easy indicator to shortlist the stocks you can further screen to invest in.

The second part of the statement about debt is also a good parameter. I usually look at that number quite closely and am elated to find a company that has zero long term debt, or has as much cash as it has debt. That’s another parameter you can look at after you have identified a company with steady earnings.

Point number 6 about an offering price is also very good. For a long term investor who views stock purchases as stake in business, you want to ensure that the price you’re paying for that stake is a fair price for what the company is earning.

For people who are not well versed with accounting concepts, this can become overwhelming but I think everyone can look at two numbers very easily and build on them. You can look at the market capitalization of a company and their current profits, and ask yourself will you pay that much money to buy the whole company to get about this much profit every year. This will eliminate many companies because they are priced high. But when you do find some that look priced reasonably, you can then look at the cash flows of the company to further analyze the company and determine is it a fair price or not.

SIPs are a small step in the ladder

I’ve been busier than usual for the past few days and I’ve only been able to look at headlines and glance at my portfolio from time to time.

I looked at my portfolio today and saw that iShares S&P India Nifty 50 Index Fund which is a Nifty based ETF that trades on the NASDAQ, and was down about 5% a month and a half ago is up 10% today. As much as I like to say that it is the nature of the markets to surprise you, and you should always expect this — I was really surprised to see this move.

Nifty itself hasn’t moved as much during this time period, and it is the appreciation of the Rupee along with the Nifty that has brought about this quick positive up-move.

The last time I bought iShares S&P India Nifty 50 was on August 27th of this year, and at that time the dominating thought in my mind was how much should this fall further to warrant more purchase? I couldn’t imagine at that time, and this is not too long ago that the ETF will be up so much in just a matter of days. I bought this with the intention of holding it for a long time so it didn’t matter if it was up or down in a few days.

This is what I had tweeted then.


If you follow me on Twitter, you can pretty much see that there is a very simple pattern I follow. Buy when the market falls and sell when it rises. The buying is usually a lot more than selling because I usually buy in installments but sell in one lot.

This strategy has worked well for me since a number of years, and I was wondering today why this simple plan is not part of mainstream advice, and why it comes across as market timing which most people absolutely abhor.

For any long term investor who views buying stocks as buying businesses (a la Buffett) – why is price not a factor while making a purchase?

I like the concept of SIPs (Systematic Investment Plans) to the extent that I feel that they save people from themselves by enforcing discipline on them and not selling in panic, but this can’t be the final stage of how you view and invest in equity.

If you invest in shares at all, and it is quite understandable if you don’t, then the ultimate goal should be to reach a place emotionally where you can have the courage to buy more when the market falls and sell off when you see euphoria in the market.

This is of course very hard as I know from personal experience and not many people are able to do it. That is perhaps the reason why not many people write about it and it is nowhere close to the mainstream idea on equity investment.

If you have SIPs then I’d suggest giving this a try. For anyone beginning, I think an easy way would be to save some money specially with this purpose, just let it lie in a savings account which can be easily accessed by you, and identify some stocks and mutual funds that you would like to invest in. Then when you hear panicked stories on the news, and read about doom and gloom in the papers, use that money to buy stocks.

You risk the money you invest, but the return can be learning a very profitable process that will continue to reward you throughout your life.

How to generate monthly inflows from Tax-Free Bonds?

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

A couple of days back, I got an investor query on my email id asking me whether she should go for NCDs issue of India Infoline Finance Limited (IIFL) or not and can we expect any tax-free bonds issue to offer monthly interest option. She also told me that she falls in the 30% tax bracket and her mother, for whom also she wants to invest, falls in the 20% tax bracket.

So, if you have been reading my posts regularly, you must be knowing my thoughts about it by now. I told her that I think it is better to invest in HUDCO tax-free bonds as compared to IIFL NCDs as she and her mother both fall in the higher tax brackets and also it is always better to go with debt securities of the government-owned public sector companies vis-a-vis private sector issuers.

But, her reason for considering IIFL NCDs was different and genuine also. She wanted to have a regular monthly income for her mother and she was not able to take a decision between Post Office Monthly Income Scheme (POMIS), which is fetching 8.40% annually to its investors for FY 2013-14, and IIFL NCDs, which are going to give approximately 43% higher interest @ 12% per annum.

Though she knew that POMIS deposit is government backed and old age people should not take high risks with their principal investments by depositing their hard-earned lifetime savings with private companies, she wanted to earn higher rate of interest, interest rate which is able to earn them somewhat higher than the spiralling inflation.

I told her that the government has not allowed any of the companies to issue tax-free bonds with monthly interest payment option. The maximum these companies can offer is to make the interest payments twice in a year, on a semi-annual basis. But, no company till date has issued bonds with a semi-annual interest payment.

So, what is the deal? How can you generate regular monthly inflows from your tax-free bonds, which are designed to pay it only once every year, and pay tax only to the minimum extent possible?

By now, we all know the taxability rules of the bonds/NCDs listed on the stock exchanges. What did you say? You do not know the tax provisions as yet? Shame on me if you do not know the taxation rules even now, I have been writing these posts since ages now.

🙂 Just trying to make you people feel a little light and prepared for reading a long post!

As per the language of HUDCO tax-free bonds prospectus – “As per third proviso to Section 48 of Income tax act, 1961, benefits of indexation of cost of acquisition under second proviso of Section 48 of Income tax Act, 1961 is not available in case of bonds and debenture, except capital indexed bonds. Thus, long term capital gain tax can be considered at a rate of 10% on listed bonds without indexation”.

I hope at least now the taxation rules are clear! No ?? Still Not ?? What did you say ?? The language does not tell you the rules for the short term capital gain tax. Oh yes, I am sorry !! You are right, my mistake !!

So, here you have the taxation provisions with respect to the short-term capital gains – “Short-term capital gains on the transfer of listed bonds, where bonds are held for a period of not more than 12 months would be taxed at the normal rates of tax in accordance with and subject to the provision of the I.T. Act.

A 2% education cess and 1% secondary and higher education cess on the total income tax (including surcharge for corporate only) is payable by all categories of taxpayers”.

I hope now it is done and nobody will forget these rules now onwards!

So, you must be asking, am I suggesting you to start selling these bonds every month from the end of the first month itself from the date of their allotment ?? You are partially right. Yes, I am suggesting you to sell 1% of your investment in these bonds every month to get a sort of monthly income, but not from the end of the first month itself, but starting from the 13th month of your investment from tax planning point of view.

How it works?

Suppose, you fall in the higher tax bracket of 30% or 20% and invest Rs. 1 lakh in any of the tax-free bond issues, HUDCO, IIFCL, PFC, IRFC, NHB or any other company. Stay invested with these bonds for at least one complete year and from the thirteenth month onwards, you can start selling 1% of your investment every month. If you do that every month, you are going to get 1% of your investment i.e. approximately Rs. 1,000, for 100 months or 8 years & 4 months. This way it is going to last till 9 years and 4 months from the date of your investment and that is how it would be helpful if your investment is for 10 years.


* The investor takes tax-free bonds in a demat account, in order to sell them on a monthly basis or periodicity of his/her choice. It is very difficult to find a buyer for the physical bonds.

* After each annual interest payment, tax-free bonds are assumed to appreciate in value exactly equal to the monthly value of their annual interest. So, if the annual interest is 8.76%, then the market price of the bond is assumed to appreciate by 0.73% every month i.e. 8.76% / 12 months.

* Tax is paid as & when each monthly cash inflow is received.

* Brokerage charges on sale of the bonds have been ignored as they vary across different broking houses and across different investors. Investors should consider them before taking a final decision.

Let me try to explain you the monthly cash inflow table. Interest earned on IIFL NCDs is taxable as per the tax slab of the investor, so it has been termed as the “Normal Tax”, whereas long term capital gain tax on listed tax-free bonds is 10.30%.

IIFL NCDs post-tax monthly inflow = Interest Rs. 1,000 – Tax Rs. 309 @ 30.90% = Rs. 691.

IIFL NCDs post-tax monthly inflow = Interest Rs. 1,000 – Tax Rs. 206 @ 20.60% = Rs. 794

IIFL NCDs post-tax monthly inflow = Interest Rs. 1,000 – Tax Rs. 103 @ 10.30% = Rs. 897

HUDCO TFBs post-tax monthly inflow (Rs. 1,006.55 – for understanding purposes)

Sale Price of 1 Bond (13th month) = Rs. 1,000 * (1 + 8.76%/12) = Rs. 1,007.30

Long Term Capital Gain (LTCG) = Rs. 1,007.30 – Rs. 1,000 = Rs. 7.30

Long Term Capital Gain Tax = 10.30% of Rs. 7.30 = Rs. 0.7519

HUDCO TFBs post-tax monthly inflow = Rs. 1,007.30 – Rs. 0.7519 = Rs. 1,006.5481 (or Rs. 1,006.55)

If the investment is for 20 years or 15 years?

If your investment is for 20 years, you can either cut down your sale of these bonds by half or you can double your investment, in order to get the same monthly inflows for the next 16 years & 8 months, from next year onwards. You can do it with 15 years option also in a similar way. But, please mind it that to trade in these bonds, you are required to sell at least one bond. So, to have such monthly income for 15-20 years, you need to invest at least Rs. 1,50,000 to Rs. 2,00,000.

What about its annual interest?

I would call it a bonus. You can use it whichever way you want. You can reinvest it next year in any of the investment instruments you want. You can use it for meeting any of your other financial goals. You can go on a holiday with that money. You can use it along with your so called monthly income (sale of these bonds every month).

Basic idea behind it?

It is similar to a systematic withdrawal plan (SWP) of mutual funds. Though it must be clear to you by now, but I want to reiterate it here that the first basic idea behind this way out is to make tax-free bonds comparable to IIFL NCDs like instruments, which are giving 1% monthly interest to its investors throughout its holding period, but the interest is taxable as per the tax slabs of the investors.

The next basic purpose is to make your investment as tax efficient as it is possible. That is why I have suggested here to start selling these bonds from the next year onwards. You are required to pay only 10% tax on your long term capital gains you make by selling these bonds after one year.

If you really require regular inflows from the beginning itself, you can start selling these bonds from the beginning itself. The maximum you would be required to pay in tax in the first year would be exactly equal to the tax you are going to pay on the interest income earned from the IIFL NCDs.

Though I am still unaware of any major fallout of this technique of getting monthly inflows out of our tax-free bond investments, I am sure there must be some. I would like you people to do some brainstorming and find out at least one or two for me, so that we can try to work more on this idea and make it even better, if we can.

RBI’s September 2013 Monetary Policy Review

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

What the Finance Minister P Chidambaram must have advised the RBI’s ex-Governor D Subbarao not to do and what he must have wanted US Federal Reserve Chairman Ben Bernanke not to do, the former Chief Economic Advisor, Raghuram Rajan has done exactly that in his first ever monetary policy as the new Governor of the Reserve Bank of India.

In the RBI’s September monetary policy today, Dr. Rajan has increased the Repo Rate, which Dr. Subbarao could have done a couple of months back, and spooked the Indian markets by his actions, which Mr. Bernanke could have done a couple of days back.

Actually, Dr. Subbarao resisted tinkering with the key policy rates in July, as he wanted the markets to initially believe that his policy actions were temporary in nature and he would reverse those measures quickly, as and when there is some stability in the currency markets. But, nobody could stop the market participants to panic at that point in time and the rupee to fall from 58-59 against the dollar to 68-69 in less than a month’s time.

Just before Dr. Rajan took charge at the Mint Street, markets were in a state of disarray. There were a number of pressure points, which were taking the global markets down and making the analysts predict NSE Nifty to touch 4,800. Those pressure points included a possible US attack on Syria over Syria’s use of chemical weapons, a high possibility of QE3 tapering by the US Federal Reserve, India’s trade deficit to remain high due to low exports & high imports, Indian rupee touching a psychological 70 mark and so on.

Call it a perfect luck or whatever, since then the global markets have seen all these fears receding very smoothly one by one. Tensions over Syria have come down considerably, India’s trade deficit has gone down to $10.9 billion in August, the rupee has recovered to below 62 levels and most importantly, US Fed has postponed its tapering programme till the time it sees the US economy growing the way they want it to grow.

Today was Dr. Rajan’s first serious test as the new Governor of the RBI. So, let us check what exactly Dr. Rajan has done in his first monetary policy and what exactly he wants to do with those measures.

0.25% hike in the Repo Rate to 7.50% – RBI has increased the Repo Rate by 25 basis points from 7.25% to 7.50%. This is the rate at which the commercial banks borrow money from the RBI for a short period of time. RBI has increased this rate to discourage banks to borrow and further lend money in the market, as the dangers of the inflation moving up have increased dramatically with a steep fall in the value of rupee since its last monetary policy.

So, what actually made him raise the Repo Rate? The answer is rising overall inflation, due to steep fall in rupee and upsurge in food inflation (including onions).

0.75% reduction in the MSF Rate to 9.50% – RBI has reduced the Marginal Standing Facility (MSF) Rate by 75 basis points from 10.25% to 9.50%. This is the rate which the RBI charges to the scheduled commercial banks for the money borrowed for their overnight liquidity requirements.

If you had made any investment in gilt funds or income funds during April-June period, then you must remember RBI’s first move in July to curb speculation in the currency market. RBI had hiked the MSF Rate very steeply by 200 basis points from 8.25% to 10.25%.

Now, the RBI has cut this rate to give some relief to the banking system for which the cost of borrowing money under this window had increased considerably. Also, RBI has been able to reduce this rate as the dangers of the currency volatility have reduced in the recent few days.

0.25% hike in the Reverse Repo Rate to 6.50% – RBI has increased the Reverse Repo Rate by 25 basis points from 6.25% to 6.50%. This is the rate at which the banks deposit their excess money with the RBI for a short period of time. This rate is linked to the Repo Rate and remains 1% below the Repo Rate. These are not the times of abundant liquidity in the banking system, so there is not much significance of hiking this rate.

Minimum daily cash reserve requirement reduced to 95% of deposits from 99% – This is the RBI’s second measure in favour of improving the sentiment in the banking system. In its second big move on July 23, RBI hiked the minimum cash reserve ratio (CRR) requirement of banks from 70% of their deposits to 99%. Today, Dr. Rajan reduced this requirement from 99% to 95%. This move is going to provide some elbow room to the banks as far as the liquidity is concerned.

No change in Cash Reserve Ratio (CRR) – RBI has left the CRR unchanged at 4%. Despite SBI Chairman, Mr. Pratip Chaudhuri, asking the RBI to cut the CRR many a times in the past, Dr. Rajan also did not bulge and decided to continue walking the same path as used by his predecessor.

Impact of the Monetary Policy

What happened today here in India was the exactly opposite of what happened in the US on Wednesday. Most of the people had expected the US Fed to announce some sort of QE3 tapering, be it of a smaller quantum, but Fed’s decision to leave it unchanged left the market participants pleasantly surprised.

Today, most of the people had expected the RBI Governor to start it from where the Fed had left it that day. Markets had expected Dr. Rajan to remain dovish and reverse most of the harsh steps the earlier Governor had taken. But, people were left extremely disappointed to have a hike in the Repo Rate and a token relief on the liquidity front.

Impact on Stock Markets: After yesterday’s big upmove and immediately after the RBI’s announcements, BSE Sensex and NSE Nifty nosedived to reverse all of their yesterday’s gains and thereafter recovered somewhat to close at 20,264 and 6,012 respectively.

Impact on Debt Markets: 10-year benchmark 7.16% G-Sec yield closed at 8.58%, 39 basis points higher than Thursday’s close of 8.19%.

Impact on Currency: Though a hike in the Repo Rate should have boosted the value of Indian rupee, but a fall in both the equity market as well as the debt market resulted in rupee closing at 62.24 vs. yesterday’s 61.77, a rise of 47 paise in the value of one dollar.

So, after RBI’s policy decisions and market closing, this is where we stand as of today:

It is such a pity that even after such a wonderful Rabi season early this year and some excellent monsoon rains in most parts of the country in the last few months, we are still struggling with a double digit food inflation. The government, which is not able to manage the supply of onions in some of the major cities of India, makes big claims to ensure food security in the remote parts of the country.

The steps Dr. Rajan has taken today, I think any sensible RBI Governor would have taken the same steps, including Dr. Subbarao. Till a few days back, Dr. Rajan’s press conferences used to reflect what the Finance Ministry’s priorities were. But, the erstwhile Chief Economic Advisor is now the Governor of the Reserve Bank of India and I think his responsibilities are his priorities now. That is what got reflected in the RBI’s monetary policy today.

I think Dr. Rajan has taken a balanced decision by increasing the Repo Rate to tame inflation and by reducing the MSF Rate to cut short-term funding costs in the banking system. After today’s 75 basis points reduction in the MSF Rate, the differential between the Repo Rate and the MSF Rate stands at 200 basis points now. I think Dr. Rajan would like to take it down to 100 basis points again, by the end of November 2013. How, what & when he does it, it will depend on the domestic as well as some of the global factors. Will he succeed in his efforts or not? As always, only time will tell. But, as an Indian, I hope he does!

IIFL 12% NCDs vs. HUDCO 8.76% Tax-Free Bonds – which one is better to invest?

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

Two debt issues opened for subscription on September 17 – India Infoline Finance Limited (IIFL) 12% NCDs and HUDCO 8.76% Tax-Free Bonds. Both these issues have seen reasonably good response from the investors. But, still there are many people who have not been able to take a decision and probably require some more help or some detailed research. Let us try to do a comparative analysis of the two.

A couple of days ago Vijay asked me to illustrate IIFL NCDs with a numeric example, involving rupee values of return.

Vijay September 17, 2013 at 10:26 am

Can you illustrate IIFL with some numeric example. I am sure, most of the reader does not understand yield definition very well.

As I did not want to edit the original post, I could not fulfill his desire. But, now I can get his request fulfilled by comparing numeric examples of both IIFL NCDs and HUDCO tax-free bonds.

There are many factors which should determine your decision and I am going to state those factors here:

Maturity Period – As interest rates hit troughs, the investors should go for the shortest possible period of investments and when interest rates hit peaks, the investors should go for the longest possible period of investments. Though it is very difficult to determine these troughs and peaks, I think the current period is one of those of higher interest rates in the recent history with the 10-year G-Sec bond yields crossing 9% psychological mark.

IIFL has a maturity period of 36 months & 60 months, whereas HUDCO is available with tenors of 10 years, 15 years and 20 years. So, which one should you invest in? If you think there is still more room for interest rates to rise, you should go for IIFL NCDs and if you agree with my view on the interest rates, then you should go for the HUDCO 20-year or 15-year bonds.

Coupon Rates & Taxability – While HUDCO is offering tax-free interest rates of 8.74%, 8.76% and 8.39% for 20 years, 15 years and 10 years respectively, IIFL has fixed a single taxable rate at 12% for both of its maturity periods, 36 months & 60 months.

Investor’s Tax Bracket – First, you should determine your income tax bracket for the current financial year and try to foresee it for those financial years also till which you are planning to stay invested in these NCDs/bonds. If you fall in one of the higher tax brackets, then I think it is better to invest in HUDCO tax-free bonds as paying tax on 12% interest income from IIFL would make it 8.29% in the 30% tax bracket and 9.53% in the 20% tax bracket.

I would say earning 8.76% with tax-free bonds with safety of a government company and ‘AA+’ rating clearly makes me favour HUDCO bonds. If one is not liable to pay any tax on the interest income earned, then only I think IIFL NCDs would score over HUDCO bonds. It is up to the investors to decide if they fall in the 10% tax bracket.

Frequency of Interest Payments – While IIFL is offering annual as well as monthly interest payment options, HUDCO has only one interest payment option and that is annual. It makes IIFL NCDs attractive for those investors who want monthly interest payment option.

Ratings, Safety & Business Model – IIFL NCDs are rated ‘AA’ while HUDCO bonds are rated ‘AA+’, a difference of just one notch. But, practically there is a lot of difference. IIFL is a private company and a 98.87% subsidiary of India Infoline Group. It is a relatively newer company with business model concentrated in two major segments, mortgage loans and gold loans.

HUDCO is a wholly-owned corporation of the government of India. It has a relatively stable business model with financing of housing and urban infrastructure in many major cities across India. IIFL’s business model is relatively riskier than HUDCO. This factor also goes in HUDCO’s favour.

Issue Size – While HUDCO is planning to raise Rs. 4,809.20 crore from its issue, IIFL wants to raise Rs. 1,050 crore. How the issue size matters? The bigger the issue size, the higher is the liquidity in the secondary markets. Higher liquidity provides easier exit option to its investors. So, I think the issue size is also positive for HUDCO bonds.

Listing – While the issue size of IIFL is smaller than HUDCO’s issue size, it is going to list on both the stock exchanges, Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). HUDCO bonds are going to list only on the BSE. Though the issue size of HUDCO is big and there will not be any liquidity problem as such, but still it would have been better if the company could have got it listed on the NSE as well. This augurs well for IIFL NCDs.

While the whole world cheers the US Federal Reserve’s policy decision not to taper QE3 and to keep its bond-buying programme steady at $85 billion per month, I think it presents a perfect platform to the Governor of RBI, Dr. Raghuram Rajan, to bring back the much awaited normalcy in the Indian bond and currency markets. If he succeeds in doing that, I think the bond investors are up for a really good time. They should then be subscribing to these bonds at these really attractive interest rates.

HUDCO 8.76% Tax Free Bonds Issue – September 2013

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

After a reasonably good response to the REC tax-free bonds, the next eligible company to come up with such an issue is Housing and Urban Development Corporation Limited (HUDCO). The company will be launching its issue from the coming Tuesday, September 17.

The rates the company is going to offer in this issue are higher than the rates offered by REC in its issue, which is still open and getting closed on September 16. There are two reasons for it, firstly, HUDCO issue is ‘AA+’ rated and that is why it can offer rates 10 basis points (or 0.10%) higher than any ‘AAA’ rated issuer. Secondly, the average G-Sec rates have been ranging higher in the past 10-20 days than they were earlier when REC came up with its issue.

As compared to REC’s 8.26% (10Y), 8.71% (15Y) and 8.62% (20Y), HUDCO is offering 8.39%, 8.76% and 8.74% rate of interest for the respective tenors.

Though the interest will be paid annually, I do not know the interest payment date as yet, as the final prospectus filed on September 11 is still not available on SEBI’s website, on BSE’s website, on HUDCO’s website and not even on any of the lead managers’ websites. It is quite disappointing for me not to have the prospectus available for public reference even three days prior to the issue opening date.

HUDCO is allowed to raise Rs. 5,000 crore from tax-free bonds this financial year, out of which it has already raised Rs. 190.80 crore through private placement. So, now it plans to raise the remaining Rs. 4,809.20 crore through this public issue, including the green-shoe option of Rs. 4,059.20 crore. The base issue size is Rs. 750 crore.

The official closing date of the issue is October 14 and the company may extend or preclose the issue, depending on the investors’ response to the issue.

There are many things which are common in this issue and the REC issue, so I will quickly state those features which are different in this issue.

Rating of the issue – CARE and India Ratings have assigned a rating of ‘AA+’ to this issue, which is also ‘Secured’ in nature. HUDCO is wholly-owned by the government of India, so the investors’ investment is quite safe.

Listing – HUDCO will get these bonds listed only on the Bombay Stock Exchange (BSE). The allotment and the listing will happen within 12 working days from the closing date of the issue. Investors can apply for these bonds either in physical form or in demat form, as per their comfort and requirement.

Interest on Application Money & Refund – The investors will get interest on their application money also, from the date of investment till the deemed date of allotment, at the same rate of interest as the applicable coupon rate is. Unlike REC issue which is to pay 5% p.a. interest on the refund money, HUDCO will pay the applicable coupon rate.

Categories of Investors & Basis of Allotment – The investors again have been classified in the following four categories and each category will have certain percentage of the issue reserved for the allotment:

Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue is reserved

Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved

Category III – High Net Worth Individuals including HUFs, NRIs & QFIs – 30% of the issue is reserved

Category IV – Resident Indian Individuals including HUFs, NRIs & QFIs – 40% of the issue is reserved

QIBs portion had 20% of the issue reserved in the REC issue and after observing their response in that issue, their reserved portion has been reduced to 10% in this issue. Category III HNI investors will get this 10% share of the pie. NRIs are eligible to invest in this issue as well, on a repatriation basis as well as on non-repatriation basis. Qualified Foreign Investors (QFIs) are also eligible.

Minimum & Maximum Investment – There is no change in the minimum investment requirement of Rs. 5,000 i.e. at least 5 bonds of Rs. 1,000 face value each. Retail Investors’ investment limit stands at Rs. 10 lakhs, beyond which they will be considered as HNIs and will get a lower rate of interest.

Interest rates of this issue look very attractive to me. Earlier I used to say that the investors in the 30% or 20% tax bracket should consider these bonds, but now I advise investors even in the 10% tax bracket to go for these bonds. Though not strictly comparable, these bonds are attractive even against IIFL NCDs or Muthoot NCDs.

I think the way Indian rupee and the stock markets have recovered in the past 10 days or so, the G-Sec yields should also start falling soon. Going forward, I think the rates should not be higher than these HUDCO bonds, unless US Fed Reserve has something very dramatic in store for us in its meeting on September 17-18.

Link to Download the Application Form of HUDCO Tax-Free Bonds

If you need any further info or you want to invest in these bonds, you can contact me at +919811797407

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Weekend links Sep 13 2013

Let’s start this week with a piece that Dr. Bibek Debroy wrote about the way out for the Indian economy. Dr. Debroy points out that the fiscal deficit is the symptom, not the disease, and goes on to list ways to increase revenue and reduce expenditure. You must have seen the steps he’s advocating earlier as well, but it was good to see them at one place, and I liked the piece.

BusinessWeek has a good article on the toilet shortage in India.

Groupon India had a deal on onions and the demand was such that their website crashed.

Voyager has entered interstellar space. A great article on what this means, and if you can comprehend it — how far it is.

These pictures of ballet dancers in random situations are really amazing and very beautifully taken.

I quite enjoyed this unofficial Goldman Sachs guide to being a man.

Finally, Kirti from BeMoneyAware interviewed me last week, and asked me questions about some questions about my blogging journey, and if you’re interested in my thoughts on the subject, the interview can be found here. 

Enjoy your weekend!

How can the citizens of India contribute and prevent value of rupee from falling?

Gunjan Talwani sent the following email day before yesterday:

Gunjan Talwani:
How can the citizens of India contribute and prevent value of rupee from falling?
Please suggest few steps.

I think this is a very noble sentiment and you don’t usually see these type of comments where people want to know what they can do to improve the situation, so I was impressed by it, and it got me thinking of what should an Indian do to prevent the value of Rupee from falling?

Buy less gold?

Gold imports were the first thing that came to my mind as the government has said several times that gold imports has burdened the CAD (Current Account Deficit) and they have raised duty on gold several times to slow down gold demand.

One way to slow down gold demand is if the people themselves started buying less gold, so that’s one way to help arrest the Rupee slide, but would this be patriotic?

I don’t think so because gold buying has increased a lot in recent years just for investment purposes and gold is being considered for this because there aren’t really that many alternatives available to Indian investors.

Most people aren’t comfortable with equities (justifiably so), real estate is ridiculously priced, and not everyone can afford that, fixed income options have all negative real rate of returns, and in this environment gold at least promises the hope of real return.

Long term readers know I don’t have any gold in my own portfolio and have never bought any throughout this rally, and my opinion on gold has certainly not changed. I’m merely saying  that most people want to choose this option, and it is not greedy or selfish for them to want to protect their money from the high inflation that has been caused by the government policies in the first place.

So, no, I don’t think it is patriotic to avoid gold.

Do not buy diesel cars?

After gold, oil is the second biggest thing on people’s mind when you talk about deficits because of its size, and also because of the various subsidies given in petrol and diesel.

If you are driving a diesel car then you’re benefiting from a government subsidy that punches a hole in the country’s finances, while you enjoy the high view from your SUV. There was a proposal to impose additional excise duty on diesel cars but I don’t think that has been implemented yet.

So, that might be a patriotic thing to do – drive a petrol car, and pay more. Would I do it myself? No, because if there is a policy anomaly then I want to take advantage of it, and the money saved from a diesel car can be used to buy onions.

Do not buy imported goods?

This is the third thing that came to mind – what if people just bought made in India with the hopes of keeping money within the country and lowering the import number so as to control CAD. I don’t think that is very practical if you look at all the things you use in your every day life, and even then it doesn’t solve the underlying problem of slow export growth. It also ignores the fact that we live in a globalized world where the whole world benefits from trade, and that’s not the problem.

Do you see the theme?

The point I’m trying to make here is that the common Indian citizen can take some steps to help the government bring down the CAD, and help the Rupee, but even if they do so they don’t solve the underlying problems like slow exports, policy inconsistencies or economic sluggishness.

I’m of the opinion that the people are the victim of these policies and this is not a situation similar to the 2008 US Housing Crisis where people who bought houses with the intention of selling them at a higher price one year down the line also had some share in the blame for the crisis. The Indian situation is different.

If you don’t attack the roots of the problems which can only be done by government policies then you can’t really find a long term solution to this problem.


I think the root cause of the Rupee decline and the economic slowdown in India is government policies and inaction, and I don’t feel that there is anything the common citizen can do to help this cause since finally policy making and implementation is beyond the public and that’s where the solution lies. This is disheartening and I hope someone can point out practical measures that I couldn’t think of but my assessment is that the government (this or the next) has to take action.

India Infoline Finance Limited 12% NCDs Issue – September 2013

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

So, the next company in line to issue non-convertible debentures (NCDs) is India Infoline Finance Limited (IIFL), a 98.87% subsidiary of India Infoline Limited (IIL). It is the same company which issued 12.75% unsecured NCDs last year in September and 11.90% / 11.70% secured NCDs in August 2011. I will talk about its past issues later in the post, but first let us check out the features of its current issue.

This year the company is offering 12% interest rate, across two maturity periods – 36 months and 60 months. The issue will open next week on September 17th and is scheduled to close on October 4th, but if required, the company may extend the closing date of the issue, depending on the investors’ response.

The company plans to raise Rs. 1,050 crore from this issue, including the green-shoe option of Rs. 525 crore. The issue size looks fairly large to me and the company plans to use these proceeds for its financing activities and business operations and also to repay its existing loans.

Categories of Investors & Basis of Allotment – The investors have been classified in the following three categories and each category will have certain percentage of the issue reserved for the allotment:

Category I – Institutional Investors – 40% of the issue is reserved

Category II – Non-Institutional Investors (NIIs) – 10% of the issue is reserved

Category III – Resident Indian Individuals (RIIs) – 50% of the issue is reserved*

* Out of 50% reserved for Category III, upto 40% of the issue will be allotted to the resident individual investors who apply for these NCDs aggregating to a value not more than Rs. 10 lakhs and upto 10% of the issue will be allotted to those resident individual investors who apply for these NCDs aggregating to a value of more than Rs. 10 lakhs. The first sub-category is called “Reserved Individual Portion” and the second sub-category is called “Unreserved Individual Portion”. In a way, the second sub-category is for HNIs.

Non-resident individuals (NRIs), on repatriation as well as non-repatriation basis, and Qualified Foreign Investors (QFIs) are also eligible to invest in this issue. NCDs will be allotted on a first-come-first-serve basis.

Rate of Interest and Tenors

Unlike Muthoot NCDs issue, which is very complicated due to its XI interest options, IIFL has kept its issue fairly simple. There is only one interest rate to deal with and that is 12% per annum. Also, there is no cumulative interest option this time and the interest will be paid either annually or on the first day of every month.

Like its previous issues, the company has kept equal coupon rate for all the categories of investors – institutional, non-institutional and the retail investors. Also, there are only two maturity periods – 36 months and 60 months.

Minimum Investment – Minimum investment requirement has been kept at Rs. 5,000 i.e. 5 bonds of face value Rs. 1,000 each.

Ratings & Nature of NCDs – CARE has assigned ‘AA’ rating and Brickwork Ratings has given ‘AA/Stable’ rating to this issue. Unlike last year, these NCDs are secured in nature and that ways, the claims of the investors this year will be superior to the claims of those investors who invested in its 12.75% NCDs last year.

Listing, Demat & TDS – These NCDs are proposed to be listed on both the exchanges, National Stock Exchange (NSE) as well as Bombay Stock Exchange (BSE). Resident investors have the option to apply these NCDs in physical form as well as demat form. But, NRIs will compulsorily require demat accounts to apply for these NCDs.

It is a standard statement for the taxable NCDs. The interest earned will be taxable as per the tax slab of the investor and TDS will be applicable if the interest amount exceeds Rs. 5,000. But, NCDs taken in the demat form will not attract any TDS on the interest income.

Profile & Financials of India Infoline Finance Limited

India Infoline Finance Limited is a credit and finance arm of the India Infoline Limited group and provides loan against property, housing loans, gold loans, commercial vehicle loans, loan against securities/margin financing and medical equipment financing to its corporate clients as well as retail clients.

IIFL has a strong network of 1,403 branches all over India and has a total loan portfolio outstanding at Rs. 9,464 crore as on June 30, 2013. The loan book of the company has grown at a CAGR of 79.3% over the last three years.

Total income, on a consolidated basis, registered a growth of 82%, from Rs. 954 crore for the period ended March 31, 2012 to Rs. 1,737 crore for the period ended March 31, 2013. Net profit for the same period registered a growth of 80%, jumping from Rs. 105 crore to Rs. 189 crore. Net interest income (NII) also jumped 81%, from Rs. 429 crore to Rs. 776 crore.

As far as its asset quality is concerned, the company has done a reasonably good job in a difficult economic environment. Gross NPAs of the company as on March 31, 2013 stood at 0.49% as compared to 0.56% as on March 31, 2012, while Net NPAs were at 0.17% as against 0.40%. Net NPAs to net worth ratio improved from 1.84% to 1.03% during the same period.

You can check the financial results of IIFL for FY 2012-13 from this link.

Previous Years’ IIFL NCDs

NCDs issued last year and in 2011 are trading at a yield higher than the coupon rates offered by the company in the current issue, except its N1 NCDs. You can check the yields and their respective prices from the table below:

So, going by the yields of its previous issues, I think it is better to buy IIFL’s NCDs from the secondary markets.

Comparison of NCD/Bond Issues open for subscription

If you want to make some investment in any of the NCDs or bonds which are open for subscription, then here are four such options – IIFL 12% NCDs, SREI 11.50% NCDs, Muthoot 12.25% NCD and REC 8.71% Tax-Free Bonds. The table below has some features which are comparable to these four issues. I have taken 36 month, annual interest options for the first three issues to make them comparable.

Though REC bonds issue is the odd one out, but then it makes the investors think why or why not tax-free bonds. If I were to invest in any of these four options, I would have gone for REC tax-free bonds, due to its safety, liquidity, tradability, tax-free interest, long duration, scope of capital appreciation, high institutional demand etc. Which one would you go for?

Link to Download the Application Form