Shiv Kukreja – Page 25

SREI Infra 11.75% NCDs Issue – August 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 skukreja@investitude.co.in

SREI Infrastructure Finance Limited is going to launch its second public issue of non-convertible debentures (NCDs) of the current financial year 2013-14 from Monday, August 24th. It is going to offer a maximum of 11.75% per annum to the individual investors for 5 years tenor and a minimum of 10.35% per annum to the institutional investors for 3 years tenor.

SREI Infra plans to raise Rs. 200 crore from this issue, including the green-shoe option of Rs. 100 crore. The issue is scheduled to close on September 17th or earlier, depending on the response for the issue. NCDs will be allotted on a first-come-first-serve basis.

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

Category I – Institutional Investors – 20% of the overall issue size

Category II – Non-Institutional Investors (NIIs) including corporates – 20% of the issue

Category III – Individual Investors including Hindu Undivided Families (HUFs) – Rest 60% of the issue

NRIs and foreign nationals among others are not eligible to invest in this issue.

Tenors and Rate of Interest

SREI came up with its first issue in April this year and as compared to that issue, the second issue looks attractive from the retail investors’ point of view. As compared to 10.75% for 3 years and 11% for 5 years in its last issue, this time the company is offering 11.50% and 11.75% respectively.

The bonds will be issued for a tenor of 3 years, 5 years and 75 months (6 years and 3 months) with monthly interest, annual interest and cumulative interest options. The monthly interest option is available only with 5 years period and will carry coupon rate of 11.16%, which effectively is 11.50% per annum.

“Double Your Money” Option – Series V NCDs offer to double your money in a period of 6 years and 3 months and effectively yield 11.72% per annum. Though it is quite attractive to hear doubling of money, I think it is better to go for shorter tenors in case of company NCDs.

Ratings & Nature of NCDs – CARE has assigned ‘AA-’ rating and Brickwork Ratings has given ‘AA’ rating to this issue. Moreover, these NCDs are secured in nature and the claims of its investors will be superior to the claims of any unsecured creditors of the company.

Listing, Demat & TDS – These NCDs are proposed to be listed on the Bombay Stock Exchange (BSE) only. Investors have the option to apply these NCDs in physical form as well as demat form, except for Series III NCDs, which carry monthly interest and will be allotted compulsorily in the demat form.

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.

Minimum Investment – There is a minimum investment requirement of Rs. 10,000 i.e. at least 10 bonds of face value Rs. 1,000.

Profile & Financials of SREI Infrastructure Finance Limited – SREI was initially registered with the RBI as a deposit taking non-banking financial company (NBFC). Effective March 31, 2011, SREI got converted into non-deposit taking NBFC and the RBI classified it as an Infrastructure Finance Company (IFC). Later, SREI got notified as a Public Financial Institution (PFI) by the Ministry of Corporate Affairs.

The company provides financial services to its customers engaged in infrastructure development and construction, with particular focus on power, road, telecom, port, oil and gas and special economic zone (SEZ) sectors in India with a medium to long term perspective.

SREI has a national presence with a network of 198 offices all over India and over Rs. 33,330 crore of consolidated assets under management (AUM). SREI’s loan disbursements have grown at a CAGR of approximately 44% in the last four years, with consolidated disbursements of Rs. 15,667 crore for the period ended March 31, 2013 and Rs. 18,600 crore for the year ended March 31, 2012.

Total income on a standalone basis for the period ended March 31, 2013 and March 31, 2012 stood at Rs. 1,666 crore and Rs. 1,181 crore respectively. Net profit for the same periods was registered at Rs. 94.96 crore and Rs. 57.96 crore respectively.

The grey area, with which the whole of the infrastructure finance industry is suffering, has also affected SREI Infra badly. Gross NPAs of the company as on March 31, 2013 stood at 2.77% as against 1.58% as on March 31, 2012, while Net NPAs were at 2.30% as against 1.18%.

SREI Infra NCDs are definitely better than some of the riskier company FDs like Unitech, Gitanjali Gems, Jaiprakash Associates or other lesser known companies. Investors, who are willing to take low to moderate risk and looking for higher returns than bank FDs or comparable company FDs, can think of investing in these NCDs. But, I think it should not be more than 5 to 10% of your total debt portfolio. Investors in the 30% tax bracket should definitely wait for the tax-free bonds or go for the tax-efficient debt funds or FMPs, as these investments should result in higher effective yields for them.

Link to Download the Application Form

REC 8.71% Tax-Free Bonds Issue – August 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 skukreja@investitude.co.in

Rural Electrification Corporation (REC) will be launching the first public issue of tax-free bonds for the current financial year from 30th of this month. The company is offering quite attractive interest rates to the retail individual investors with 8.26% for 10 years, 8.71% for 15 years and 8.62% for 20 years. These rates are higher by approximately 0.70% to 1.50% as compared to the rates offered last year.

REC plans to raise Rs. 3,500 crore from this issue, including the green-shoe option of Rs. 2,500 crore. Though the official closing date of the issue is September 23rd, I think the issue should get closed before that due to oversubscription.

The government has allowed REC to issue Rs. 5,000 crore worth of tax-free bonds this financial year and the CBDT notification has mandated a minimum of 70% of this amount to be raised from public issues. As the issue size is Rs. 3,500 crore, if it gets fully subscribed this time itself, I think REC would raise rest of the money through private placements only and it will become the last issue of REC this financial year.

NRIs, QFIs & “Retail Individual Investor” – Non-Resident Indians (NRIs) on repatriable as well as non repatriable basis and Qualified Foreign Investors (QFIs) are also eligible to invest in this issue. The scope of a retail individual investor, investing upto and including Rs. 10 lakhs, has got broadened with the introduction of NRIs and QFIs (as individuals). It includes Hindu Undivided Families (HUFs) also through the Karta.

So, the investors have been classified into the following four categories:-

I – Qualified Institutional Bidders (QIBs) – 20% of the issue reserved

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

III – High Net Worth Individuals including HUFs, NRIs & QFIs – 20% of the issue reserved

IV – Retail Individual Investors including HUFs, NRIs & QFIs – 40% of the issue reserved

Interest Payment Date & Record Date – As this question gets asked by many of the investors throughout the year, it is better to mention it here itself as the date is known in advance this time. Interest will be paid on December 1st every year and the record date will be 15 days prior to that.

No Cumulative Option – There is no option of taking cumulative interest at the time of maturity with these bonds. Interest will be paid annually.

Safety, Ratings & Nature of Bonds – Being a ‘Navratna’ PSU, REC offers a high degree of safety as far as your investment is concerned and that gets reflected in the ratings assigned to this issue. The issue has been rated ‘AAA’ by four rating agencies, CRISIL, CARE, India Ratings and ICRA. It is the highest rating given by each of these companies. Also, these bonds are secured in nature against certain assets of the company.

Listing – REC bonds will get listed on the Bombay Stock Exchange (BSE) within 12 working days from the closing date of the issue. Investors have the option to apply these bonds as per their choice, either in physical form or in demat form.

TDS & Minimum Investment – As these are tax-free bonds, there is no question of TDS getting deducted, whether you take them in physical form or demat form. Minimum investment required is Rs. 5,000 only i.e. 5 bonds of Rs. 1,000 face value each.

Interest on Application Money & Refund – REC will pay interest to the successful allottees at the applicable coupon rate and at 5% per annum to the unsuccessful allottees.

Tax Treatment on Sale – Listed bonds held for more than 12 months qualify as long term capital assets and if sold thereafter, would attract a flat 10% capital gain tax, without indexation benefit. However, if the bonds are sold prior to holding them for more than 12 months, then short-term capital gain tax would be applicable, as per the tax slab of the investor.

Key Attractions of these Bonds: There were many issues with the tax-free bonds issued last year. There was a huge difference between the interest rate paid to the retail investors and the interest rate paid to other investors. Also, the subsequent buyer from the secondary markets was to get a lower rate of interest. Moreover, the cut from the G-Sec rate was also set on a higher side.

I think most of those issues have got rectified this year. Here are some of the key attractions of these bonds this year:

High Interest Rates – Due to the falling rupee and the unsuccessful measures taken by the Government and the RBI to control it from further fall, the yields of the benchmark government securities (G-Secs), against which the coupon rates of these tax-free bonds get fixed, have risen sharply in the last 45 days or so. 10-year benchmark yield touched a high of 9.47% before falling sharply to 8.25%. Thanks to this jump, the company has been able to offer such attractive coupon rates, especially for the 15 years period.

A word of caution. 10-year benchmark yield has again jumped back to close at 8.78% on August 27th. If the economic fundamentals of the country continue to deteriorate at the same speed as they have been doing, the yields could keep moving higher and the rupee could keep falling further against the dollar. But, I still hope India would come out of the current crisis soon and as the macroeconomic things get stabilised, these rates would look highly attractive again.

High Interest Rates, even if bought from the Secondary Markets – As per the CBDT notification – “The higher rate of interest, applicable to RIIs, shall not be available in case the bonds are transferred by RIIs to non retail investors”. So, the interest rates earned by the retail individual investors this year would remain higher even if they buy these bonds from the secondary markets subsequent to the offer period.

Your eligibility for a higher rate will depend on the number of bonds held in your name on the record date and the same will get tracked by your PAN number. Your holding should not be more than 1000 bonds per issue on the record date to get higher rate of interest.

Till last year, only the first allottees were eligible for a higher rate of interest and the subsequent buyers from the secondary markets were supposed to get a lower rate of interest. This factor will encourage the retail investors to participate in the secondary markets and thereby result in higher liquidity.

Low Differential – The differential between the rates offered to the retail individual investors and the other categories of investors has been cut down to 25 basis points (or 0.25%) only, as compared to last year’s 50 basis points (or 0.50%). This is the best step that has been taken this year. This factor would attract higher participation from the other categories of investors, both during the initial offer period as well as in the secondary markets.

I honestly think that these tax-free interest rates are very attractive. If I compare these rates with the interest rates on bank fixed deposits, the rates look quite similar, but with huge difference of tax applicability. I seriously hope India’s macroeconomic picture should start looking better in the days to come, only then we will be able to enjoy these high rates, otherwise inflation would again eat up all fruits of our hard work.

Link to Download the Application Forms of REC Tax-Free Bonds

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

IDBI Tax Saving Fund – ELSS u/s 80C

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

IDBI Mutual Fund has come up with a new fund offer (NFO) of its open-ended equity-linked savings scheme (ELSS), IDBI Tax Saving Fund, from August 20th. The scheme seeks to invest predominantly in a diversified portfolio of equity and equity related instruments with the objective to generate capital appreciation and income along with the benefit of income tax deduction u/s 80C of the I-T Act, 1961.

The fund plans to invest at least 80 per cent of its corpus in equity and equity-related instruments and a maximum of 20 per cent in debt and money market instruments. The scheme closes on September 3rd and will reopen for continuous sale from September 17th.

Lock-in period: As with all other tax saving mutual fund schemes (ELSS), this fund also carries a lock-in period of 3 years, after which an investor can redeem his/her investment back to IDBI Mutual Fund whenever he/she wants.

NAV of Rs. 10 Per Unit: The units will be available at Rs. 10 face value during the NFO period and at market-linked NAV thereafter. Even after years of investor education, if somebody still feels Rs. 10 NAV is better than Rs. 100 NAV or Rs. 1000 NAV, then he/she can think of subscribing to this NFO. But, the fact would remain intact that a scheme with Rs. 10 NAV is in no way better than any other scheme with a higher NAV.

Benchmark: The performance of the scheme will be benchmarked against S&P BSE 200, which is an index of the top 200 companies listed on the Bombay Stock Exchange.

Profile of the Fund Manager: I think the fund manager is the most important factor to be considered while investing in any of the mutual fund schemes, especially an NFO. V. Balasubramanian, aged 54 years, is going to manage the corpus under this scheme. He is M.Com. and Certified Associate of the Indian Institute of Bankers (CAIIB). He has over 32 years of experience in the Finance field, with 14 years in the Mutual Fund industry and 16 years in Banking, out of which he worked for 8 years in treasury branch of Indian Bank.

He has been a fund manager with IDBI Mutual Fund since November 2011 and is already managing seven of its schemes, including IDBI Nifty Index Fund, IDBI Nifty Junior Index Fund and IDBI India Top 100 Equity Fund among others. Here is some relevant data for the schemes he is already managing:

As there are already so many tax saving schemes competing in the market with their long-term performance to be judged upon, I dont find any compelling reason for the investors to jump on to this new fund offer. Investors should check the performance of this fund before committing their hard earned money in a tough economic environment.

Tax Free Bonds Notification – FY 2013-14

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

Amid volatile stock markets, rising interest rates and weakening economic growth, the investors are running out of patience now, even with their so-called “safe debt investments” in the form of debt mutual funds, including the ‘safest’ liquid funds. They now want only those investments in their portfolio which are offering fixed guaranteed returns, even if the returns are lower than debt mutual funds.

One such investment, which has been really attractive for them for the past few years, is Tax-Free bonds. The Central Board of Direct Taxes (CBDT) has notified the rules on issuance of tax-free bonds for the current financial year – 2013-14. In the budget this year, the Finance Minister P Chidambaram proposed tax free bonds to the tune of Rs. 50,000 crore, the size of which, as per the notification, has been cut to Rs. 48,000 crore.

The notification for the tax free bonds for the current financial year got issued by the CBDT on Thursday, August 8th. Here is the Taxmann link to the notification.

There are a few changes in the rules for this year’s bond issuances as compared to the last year and I will list out all those changes later in the post. Let us first check out the features and other details of the notification.

Thirteen companies in the infrastructure development or infrastructure finance space have been authorised to issue tax-free bonds this year, namely IIFCL, IRFC, NHAI, REC, PFC, HUDCO, NHB, NTPC, NHPC, IREDA, AAI, Ennore Port and Cochin Ship Yard. These bonds will be issued for 10 years, 15 years or 20 years. It is not clear though which entities will be allowed to issue these bonds for 20 years. Last year, only IIFCL was allowed to issue these bonds for 20 years.

Here is the list of all these entities along with the stated limits of amount to be raised through these tax free bonds:

The investors have been classified in the following four categories:-

1) Retail Individual Investors (RIIs)

2) Qualified Institutional Buyers (QIBs)

3) Corporates

4) High Net Worth Individuals (HNIs)

The definition of a Retail Individual Investor has been left unchanged this year. As per the notification, Retail Individual Investors would mean those individual investors, Hindu Undivided Families or HUFs (through Karta), and Non Resident Indians (NRIs), applying for up to Rs. 10 lakhs in each issue. Individual investors investing more than Rs. 10 lakhs will be classified as High Net Worth Individuals (HNIs).

The companies are allowed to issue these bonds either through public issues or private placements. As per the notification, at least 70% of the authorised amount of bonds issued by each entity will have to be raised through public issues. For instance, if IIFCL raises Rs. 10,000 crore from these bonds this year, then Rs. 7,000 crore out of it will have to be raised through public issues only and the rest Rs. 3,000 crore, IIFCL can raise through private placements.

Like last year, there would be an applicable ceiling on the coupon rates offered by the issuer companies, based on the reference Government security (G-sec) rate. The ceiling coupon rate for a AAA rated issuer company will be 55 basis points (or 0.55%) less than the reference G-sec rate in case of Retail Individual Investors and 80 basis points (or 0.80%) less than the reference G-sec rate in case of other investors, like Qualified Institutional Buyers (QIBs), Corporate and High Net Worth Individuals (HNIs).

In case of issuer companies having credit rating of AA+, the ceiling coupon rate will be 45 basis points less than the reference G-sec rate in case of Retail Individual Investors and 70 basis points less than the reference G-sec rate in case of other investors.

In case of issuer companies having credit rating of AA or AA-, the ceiling coupon rate will be 35 basis points less than the reference G-sec rate in case of Retail Individual Investors and 60 basis points less than the reference G-sec rate in case of other investors.

In case the issuer company decides to make the interest payments semi-annually, it will have to lower the coupon rate by 15 basis points or 0.15%.

As per the notification – “The reference G-sec rate would be the average of the base yield of G-sec for equivalent maturity reported by Fixed Income Money Market and Derivative Association of India (FIMMDA) on a daily basis (working day) prevailing for two weeks ending on Friday immediately preceding the filing of the final prospectus with the Exchange or Registrar of Companies (ROC) in case of public issue and the issue opening date in case of private placement.”

There are quite a lot of things which would make the retail investors happy this year.

1. The coupon rates to be offered this year will be higher than the last year and there are two reasons for that. One, the yields on government bonds have risen this year as compared to the last year when these bonds got issued. Second, the cap on the ceiling coupon rate will get higher as the deductions from the reference rates have been lowered to 55-80 basis points as compared to 65-115 basis points of last year.

The demand from the QIBs, corporates and HNIs was very muted last year as the cut from the reference rates was quite high at 115 basis points (or 1.15%). This year it has been lowered to 80 basis points (or 0.80%). I think their demand for these bonds would be higher this year and it would also help increase liquidity in the secondary markets.

2. One thing which is very important to notice here is that the difference between the rates offered to the retail individual investors and the other categories of investors has been cut down to 25 basis points (or 0.25%) only, as compared to last year’s 50 basis points (or 0.50%). I think this factor also would attract higher participation from the other categories of investors and thus increase liquidity in the secondary markets.

3. As per the notification “The higher rate of interest, applicable to RIIs, shall not be available in case the bonds are transferred by RIIs to non retail investors”. Till last year, only the first allottees were eligible for a higher rate of interest and the subsequent buyers from the secondary markets were supposed to get a lower rate of interest. The language of the notification suggests me that the interest rates earned by the retail individual investors (RIIs) this year would remain higher even if they buy it from the secondary markets subsequent to the offer period. This factor will have greater participation from the retail investors in the secondary markets and thereby result in higher liquidity.

4. Like last year, in case of public issues, 40% of each such issue will be reserved for the retail investors category. So, there is no cut in the reserved portion of the retail investors.

As the 10-year benchmark G-sec yield touched 8.40% today, it would be good for these companies to come out with such issues soon so that they are able to attract sufficient participation from the investors. But, at a time when the economy is in a really bad shape and companies are reluctant to do any kind of capex, do these companies really require these funds for infrastructure development or for further lending?

Some of these companies, like NHAI, are already sitting on a huge cash in their books and are unable to properly utilise this money and some of these companies, like PFC and REC, are wasting these funds in debt restructuring of state electricity boards (SEBs). I don’t know whether it would be wise to invest in these bonds from value-addition point of view, but from returns point, I think it would be a good opportunity for the investors in the 30% and 20% tax brackets.

Steep fall in Debt Fund NAVs – Reasons behind Tuesday’s Bloodbath

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

A 3%+ fall in the NAV of an equity mutual fund is somehow acceptable for an investor, as I think almost every investor knows equity markets remain volatile and such a movement in either direction is part and parcel of stock markets. But, how would a risk-averse investor react to such a steep fall in a debt fund scheme?

It would definitely be a rude shock for a conservative investor, who invested in such a scheme a few weeks back, expecting at least a couple of rate cuts from RBI in the rest of the financial year and thereby to earn somewhat better returns as compared to bank FDs.

On Tuesday, July 16th, some gilt funds suffered such a steep fall in their NAVs. Other debt fund categories, such as income funds and dynamic bond funds, also suffered huge losses. Even short-term funds, ultra short-term funds and liquid funds, which are considered as the safest options of mutual fund schemes, generated negative returns for their investors.

So, what caused such a big fall in the NAVs of all these debt funds?

Indian rupee has been falling and the fall is quite worrisome as it has happened quite fast. It is also making headlines in the newspapers and people are talking about it cursing the government, so it becomes more worrisome in an election year. In order to give some strength to the falling rupee, RBI in consultation with the finance ministry and SEBI took some short-term measures on Monday to squeeze excess liquidity from the system.

What are those measures and what do they mean?

* The Marginal Standing Facility (MSF) rate is recalibrated with immediate effect to be 300 basis points above the policy repo rate under the Liquidity Adjustment Facility (LAF). Consequently, the MSF rate will now be 10.25 per cent.

* Accordingly, the Bank Rate also stands adjusted to 10.25 per cent with immediate effect.

First, we need to understand what is Liquidity Adjustment Facility and what the Marginal Standing Facility rate is?

Liquidity Adjustment Facility is a policy tool which allows banks to borrow money from the RBI through repurchase agreements or popularly called repo transactions. As the name itself suggests, LAF has been provided to aid the banks in adjusting their day-to-day liquidity mismatches. LAF consists of repo and reverse repo operations. Marginal Standing Facility rate is the rate at which the scheduled banks can borrow funds from the RBI for their overnight liquidity requirements.

So, before Monday’s announcements, the MSF rate was 8.25%, 100 basis points (or 1%) above the repo rate of 7.25%. On Monday, RBI increased it to 10.25% to make it costlier for the banks to borrow and thereby tighten the liquidity.

Moreover, most of the market participants were surprised by such moves and they are considering these announcements as a prelude to policy rate changes.

* The overall allocation of funds under the LAF will be limited to 1.0 per cent of the Net Demand and Time Liabilities (NDTL) of the banking system, reckoned as Rs.75,000 crore for this purpose. The allocation to individual banks will be made in proportion to their bids, subject to the overall ceiling. This change in LAF will come into effect from July 17, 2013.

Earlier till Tuesday, July 16th, this percentage was 2% of the Net Demand and Time Liabilities of the banking system. So, by reducing it from 2% to 1%, RBI squeezed Rs. 75,000 crore from the system and capped it at Rs. 75,000 crore only from its earlier limit of around Rs. 1,50,000 crore.

This measure made the banks and the corporates to rush to the mutual fund houses on Tuesday to redeem their investments in debt funds, especially liquid funds, ultra short-term funds and short-term funds. Such a huge redemption by these entities caused a very high supply of these securities and therefore a fall in their values.

* The Reserve Bank will conduct Open Market Sales of Government of India Securities of Rs.12,000 crore on July 18, 2013.

RBI conducted this open market operation (OMO) today evening to squeeze an additional Rs. 12,000 crore from the system, but the results of the auction were shocking. Against its notified amount of Rs. 12,000 crore, RBI received bids worth Rs. 24,279.20 crore. But, the central bank accepted bids worth Rs. 2,532 crore only and rejected the remaining bids worth Rs. 21,747.20 crore. But, why the RBI did so?

I think RBI was not comfortable with the low quotes (or higher yields) at which the bids were placed. With this rejection, RBI wants to send a message to the market participants that the measures taken by it on Monday are temporary in nature and people should not use it as an opportunity to ask for higher yields on government securities.

But, at the same time, I think the market participants are also confused and probably right in their decision to quote higher yields as they are not able to adapt to the fast changing market dynamics and really do not know what the ideal yield should be for these long-term government securities in the current highly complicated interest rate environment.

Impact on Stock Markets: RBI measures spread the negative sentiment to stock markets also as the BSE Sensex lost 183.25 points, down 0.91% and the NSE’s Nifty declined 75.55 points or 1.25%.

Impact on Rupee: The booster dose of RBI helped rupee to jump to 59.31 per dollar, up 0.97% from its previous close of 59.895.

Impact on Borrowers: The banks which were planning to cut interest rates on home loans, car loans etc. must have changed their minds by now. So, the borrowers hoping for a rate cut should cut down their own expectations for a low interest rate regime.

Impact on Depositors: Some good news for the depositors. The fear of deposit rates falling has turned into a hope of them rising for a short term. Rajat Monga, CFO of Yes Bank, said that he expects deposit rates to harden 50-75 bps in the short-term.

Impact on the Government Borrowings & Fiscal Deficit: The interest rate tightening will increase the cost of government borrowings and thus worsen the condition of our fiscal deficit. High time for the government to take some bold decisions. Just a hike in FDI limits will not make foreign investors invest in India, they should be able to foresee returns getting generated on their investments.

These are turbulent and testing times, not just for our economy, but for our markets as well, be it stock markets, bond markets, forex markets or commodities markets. The question is, at a time when most of the professional fund managers or the so-called market experts are not able to take their investment decisions, what should a normal household investor do in such a times? It is a million dollar question and again, for most of the conservative investors, investing in bank FDs is the best solution.

Shriram Transport Finance NCD Issue – 2013-14

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

Regular readers of OneMint must be quite familiar with NCDs or non-convertible debentures. There have been many such NCD issues in the past couple of years and here is one such public issue for this financial year. Shriram Transport Finance Company Limited (STFCL) will be launching this issue from July 16th and the same will get closed in a couple of weeks time on July 29th.

Size of Shriram Transport NCD Issue, Ratings and Safety

The size of the issue is Rs. 750 crore, including an option with the company to retain over-subscription to the tune of Rs. 375 crore. The issue has been rated AA/Stable by CRISIL and AA+ by CARE.

These NCDs are also secured in nature, which means some specific immovable property or other assets will be mortgaged in favour of the Debenture Trustee to cover 100% of the principal and interest payments. In case the company is not able to pay your principal investment back at the time of maturity or goes insolvent before that, the investors have the right to claim their payments by getting the assets liquidated.

Categories of Investors

The investors would be classified in the following four categories:

Category I – Institutional Investors
Category II – Non-Institutional Investors (NIIs)
Category III – High Net-Worth Individuals (HNIs)
Category IV – Retail Individual Investors (RIIs)

50% of the issue is reserved for the Retail Individual Investors i.e. for the individual investors investing up to Rs. 5 lakhs, 30% of the issue is reserved for the High Net-Worth Individual Investors 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. The allotment will be made on a first-come-first-served basis.

Tenors and Rate of Interest of Shriram Transport NCD

The bonds will be issued for a tenure of 36 months and 60 months with annual interest option and cumulative interest option. The bonds will offer the base coupon rates of 9.65% per annum and 9.80% per annum for a period of 36 months and 60 months respectively. For Series II and Series V, 50% of the face value will be redeemed after completion of 48 months and the remaining 50% will be redeemed after 60 months from the date of allotment.

Like last year, category III & category IV investors i.e. individual retail and HNI investors including HUFs, will be given an additional incentive over and above the base coupon rate and it will be 1.25% per annum for 36 months and 1.35% per annum for 60 months, making it an annual coupon rate of 10.90% and 11.15% respectively. So, irrespective of your investment amount as an individual, you will keep getting the higher rate of interest, even if you are an HNI with investments in excess of Rs. 5 lakhs.

There is a monthly interest option as well but it is available only under 60 months period and that too with a lower rate of interest of 10.63% per annum, including the additional incentive of 1.23% per annum.

The company has decided to keep the minimum investment requirement of Rs. 10,000 i.e. 10 bonds of face value Rs. 1,000.

Listing on the Stock Exchanges and TDS

These NCDs will get listed on the National Stock Exchange (NSE) as well as on the Bombay Stock Exchange (BSE). Investors will have the option to apply these NCDs in physical form also, except for Series III NCDs, which will be allotted compulsorily in the demat form.

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, if you take these NCDs in the demat form, the company will not deduct any TDS on it.

Financials of the company

During the year ended March 31, 2013, total income of the company increased by 11.37%, from 5,894 crore to 6,564 crore and the net profit jumped 8.27% from 1,257 crore to 1,361 crore. Assets under management (AUM) figure stood at Rs. 49,676 crore as against Rs. 40,215 crore of last year, a jump of 23.53%. Net interest margins (NIMs) also jumped to 3.64% as against 2.91% of previous year.

Gross NPAs and Net NPAs of the company stood at 3.20% and 0.77% as on March 31, 2013 as against 3.06% and 0.44% respectively as on March 31, 2012.

A couple of significant points to be mentioned here. Shriram Capital is the promoter company of Shriram Transport Finance Company Limited (STFCL) and it has applied for a banking license with the RBI for which the deadline ended earlier this month on July 1st. Also, Ajay Piramal, the Chairman of Piramal group, recently acquired 10% stake in Shriram Capital for a reported Rs. 650-700 crore, valuing the promoter company at Rs. 6,500-7,000 crore. These two events speak in favour of the company and strengthen investors’ confidence also.

Link to Download the Application Form

Why Good News for US Economy is a Bad News for Indian Economy, Indian Rupee & Indian Markets?

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

US economy is recovering fast and probably faster than most of the analysts had expected a few months back. Earlier these analysts had a view that though the US economy is recovering, the recovery would be fragile till the time the employment situation improves. The US Bureau of Labor Statistics on friday released the Non-Farm Payroll numbers and the numbers were extremely good. After adding 195,000 jobs in May, this number got released at 195,000 again for June. So, is the US economic growth back on track and if yes, why is it bad for the emerging markets including India?

The immediate effect of this strong uptick in the US jobs growth is that the US Dollar has further strengthened and US bond yields have risen substantially in an anticipation of a further strengthening of US growth in the near future. The 10-year US treasury bond yield jumped 9.42% on friday itself, from 2.50% to 2.74%. This is a very steep rise in a single day. If we look at the yield movement since May 1, 2013, it has risen from 1.62% to 2.74%, a rapid jump of 68% in just over two months.

1-Year Chart of US 10-year Govt. Treasury Bond Yield

Source: Bloomberg.com

Earlier in June, the US Federal Reserve announced its intention to start tapering quantitative easing (QE) and thereby cut back on its unprecedented asset purchases. This mere announcement of a possible gradual withdrawal of quantitative easing sent all the major international financial markets into a tizzy, as it made the institutional investors sell their holdings quite heavily in almost all the markets, especially in emerging markets like India, massively increase their cash holdings and rethink their investment strategies and asset allocation region-wise.

Foreign Institutional Investors (FIIs), who had pumped in a huge amount of money into the Indian markets till May 2013 this year, pulled out heavily from the Indian debt markets and equity markets in June, to the tune of $5.68 billion and $1.85 billion respectively. This huge pullout by FIIs, good prospects of US economic growth, strengthening of USD, no relief from the bad GDP growth numbers & deficit numbers here in India etc., all have resulted in a steep fall in the value of Indian rupee and hardening of bond yields.

After hitting a low of 7.09% immediately after its auction in May, the 10-year 7.16% benchmark govt. bond yield has risen quite swiftly to 7.49% by friday. With the US non-farm payroll numbers announced on friday, the yield is expected to rise further here in monday’s trading. Similarly, the rupee is expected to cross 61 level mark against the US dollar on monday.

With the yields moving higher and the rupee getting weaker, the case for the RBI to cut interest rates has got very weak. So much weak that some of the analysts have started issuing reports predicting the inflation to take a U-turn once again and the RBI to raise its policy rates to stem the rupee fall and contain prices of imported goods. It is again going to put a lot of pressure on some of the struggling debt-heavy manufacturing companies.

So, at a time when Indian economy badly requires foreign money inflows to bridge their current account deficit and to strengthen the falling Indian currency, there is a big threat that the FIIs are thinking otherwise. FIIs are ready to move their money back to the US debt and equity markets at the slightest of signs of US growth getting stronger and Indian growth not moving out of the mire.

So, what should the Indian investors do in the current situation? – I think the declining trend in India’s economic fundamentals should take a U-turn very soon, probably in the next few days or few weeks. Indian govt bond yields, which had fallen down quite sharply in May, have risen with a similar intensity in June and should top out sometime this week from a short-term perspective. The investors, who are sitting on the sidelines to invest in the gilt funds or income funds to make money due to interest rate fall, should put a certain percentage of their investible surplus into these funds sometime this week itself.

Though not easily visible, some of the Indian economic fundamentals have also started improving. As the US growth returning back to some normal levels is a good news for the global economies including Indian economy in the long-term, I expect the equity markets also to do well from medium-term to long-term perspective. The investors are advised to go stock specific and do a thorough research before committing their hard-earned money to any of the stocks. Probably I am sounding too optimistic on the Indian markets than the actual picture at the ground level, but only the investors, who invest in markets in advance before they actually make a turnaround, make good money in these markets.

Impact of Gold Price Crash on Gitanjali Gems, Its Share Price & Company’s Fixed Deposit Offer

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

Will you deposit your hard-earned money with a company for which even the existing lenders have closed their doors? Is 11.5% rate of interest for 1-year deposit or 12.5% rate of interest for 3-year deposit attractive enough for you to risk your principal investment itself?

Shilpa raised a query regarding Gitanjali Gems’ Fixed Deposit scheme under Suggest A Topic.

Shilpa Ganeriwal July 4, 2013 at 9:16 am

The recent full page advertisement in ET about the fixed deposit scheme launch by geetanjali jewellers looked interesting. THe interest rate offered was 11.5 %. I was looking for CRISIL rating or any such type but could not get.

My question is what could be the reason for such a way of raising money, is it something like an NBFC and how reliable could this be.

Details of Gitanjali Gems Fixed Deposit Scheme:

The company does not allow premature withdrawal during first 6 months from the date of deposit. The terms of the deposit also states “Request for premature withdrawal may be permitted after 6 months with specific reason at the sole discretion of the Company only and cannot be claimed as a matter of right by the Depositor”.

Also, even if you are permitted to withdraw your investment anytime after 6 months, the company will pay 1% lower rate of interest than the applicable rate.

As I started writing this post, the share price of Gitanjali Gems Ltd. was at Rs. 181.10 on the National Stock Exchange (NSE) and Rs. 183.15 on the Bombay Stock Exchange (BSE), locked down at the lower circuit of 5%. Let me tell you that there were 404 sell orders pending on the NSE alone, with the sellers desperate to find an exit door by selling 1,32,37,259 shares of the company. But they are not able to do so as the buyers are just not interested in paying even Rs. 181.10 for a stock which touched an intraday high of Rs. 534.05 on June 20th this year and has fallen 66.08% since then, hitting new 52-week lows.

In fact, Gitanjali Gems is not the only stock in the Gems & Jewellery sector which has seen a sharp fall in its share prices. Titan, Shree Ganesh Jewellery House, Tribhovandas Bhimji Zaveri (TBZ) etc. are some of the companies which have suffered huge market cap erosion due to a sharp fall in their share prices in the last one month or so.

Gitanjali Gems 1-Year Price Chart

Titan Industries 1-Year Price Chart

Shree Ganesh Jewellery House Limited (SGJHL) 1-Year Price Chart

Tribhovandas Bhimji Zaveri (TBZ) 1-Year Price Chart

Images Source: Bloomberg.com

The primary reason behind this huge fall in the share prices of all these companies which belong to the Gems & Jewellery sector is very well known – a steep fall in gold prices in the international markets, which was triggered by fears of the US Federal Reserve tapering quantitative easing (QE). Gold prices have fallen around 35% from a 52-week high of $1804/oz on October 4th last year to touch a 52-week low of $1179/oz on June 28th last week.

Also, the government and the Reserve Bank of India (RBI) have taken several measures in the past few months to slow down gold imports, which have been blamed for the widening of our current account deficit (CAD). Last month, the government raised the import duty on gold from 6% to 8%, after which the RBI issued a notification, restricting gold imports only with 100% cash margin. Due to all these factors, gold demand has slowed down considerably here in India.

But, what is wrong with Gitanjali Gems? Analysing its financial statements, it seems the company has been doing quite well in the past and stands on a very strong footing. So, do the measures taken by the government and the RBI make business so difficult for the company that it is likely to see a sharp fall in its profitability or make the company default on its loans and other credit facilities? Are all these the only factors behind this kind of a steep fall in the share prices of Gitanjali Gems? I do not think so. I think there is something else also and SEBI is likely probing that.

SEBI’s surveillance department has taken up the matter and sought reports from exchanges on the stock’s sharp price movement. Market rumors also suggest that SEBI is also examining a suspicious trading link between Gitanjali and Prime Securities, a well known broker firm. It suspects that Prime Securities had a role to play in the internal funding of as much as Rs. 75-100 crore during Gitanjali’s IPO period.

At the end of March 31, 2013, Gitanjali Gems carries a gross debt of Rs. 5,000 crore in its balance sheet, at an average rate of interest of approximately 8%. As on this date, the promoters of Gitanjali have around 34.96% of their shareholding being pledged with their lenders.

Since June 18th, Gitanjali Gems has made several filings to the BSE, in which it has disclosed that Mehul Choksi, Chairman and Managing Director of Gitanjali Gems, has purchased a large quantity of Gitanjali shares from the open market and have pledged them further to the company’s lenders. In the past few days, some of the lenders have even invoked these pledges, including Macquarie Finance (India) Private Limited (MFIPL) which has invoked 5 million pledged shares in just two days, June 28th and July 1st, acquiring 5.43% stake in the company. Lenders generally invoke pledged shares when a borrower, faced with a steep fall in its share price, is not able to deposit additional margin with the lenders.

So, amid all this high-tension drama playing out within the company and the gold market, is it advisable to lock your money for 3 years in Gitanjali Gems’ Fixed Deposit scheme for 12.5% annual return?

Personally, I am not going to do that as the safety of my principal is more important for me rather than a promise of higher returns and I am sure the investors also know the answer and need no further advice regarding the same.

Some financial advisors have different views regarding the same and their views are also welcome.

Myinvestmentideas.com

Saving-Ideas.com

ProfitKrishna.com

Understanding Inflation Indexed 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 skukreja@investitude.co.in

Budget 2013 had â€œnext to noneâ€ changes for the Indian taxpayers, investors or savers. As far as the investment options are concerned, some minor changes were made in the Rajiv Gandhi Equity Savings Scheme (RGESS) and a new kind of bonds got proposed to be introduced from June 2013.

Most of you must be aware about it by now, these are Inflation-indexed bonds (IIBs) or inflation-indexed national security certificates which will link their capital appreciation to inflation rates.

High inflation has left Indian investors earning negative real interest rates and that ways, it has reduced their purchasing power also. Investments by Indian households in financial instruments have also dipped to its record lows in the recent times. IIBs, by definition, are meant to provide protection against inflation to its investors.

The basic idea behind launching these bonds is to incentivise Indian household sector to invest in financial instruments rather than buy gold and thereby hedge the investorsâ€™ investments against high inflation and lower the gold demand here in India.

As per the Economic Survey of 2013: â€œGold is considered as a hedge against inflation. Investors, especially in the middle-class, invest their savings in gold, which, in turn, has created a huge demand for the yellow metal. This necessitated imports, resulting in foreign exchange outgo, causing concerns for the RBI and the government. Like gold, the investment in IIBs would help hedge against inflation.â€

India is the largest importer of gold in the world as people have a charm of owning it as jewellery and they also have a view that the gold prices always increase over a period of time, even if there is a small fall in its prices in the short term.

India imports a large percentage of its gold consumption and makes payments in foreign currency for the same. A rise in gold demand and its imports results in a rise in demand for dollars which is a big negative factor for our economy as it results in a fall in the value of Indian rupee and a higher current account deficit (higher imports – lower exports). Ultimately, it results in even higher inflation.

IIBs are not new to the financial markets. The RBI had introduced inflation-indexed bonds some years ago, which, however, did not take off due to poor response. It was then decided to re-design the instrument.

RBI has been advocating the re-introduction of IIBs for quite some time now and it also brought forward a technical paper on IIBs in October 2010.

IIBs – Good for the Govt.

IIBs benefit both the investors as well as the issuers. Research suggests that during inflationary periods, the governmentâ€™s weighted average cost of market borrowings through IIBs would be cheaper in comparison to nominal dated securities and thus it would be able to raise its required borrowings in a cost effective manner. It also suggests that the nominal interest payouts would be in line with the revenues of the government, leaving minimum mismatches on account of inflation.

Also, if the government succeeds in its attempt to attract a portion of investorsâ€™ money invested in gold or gold-linked instruments towards these IIBs, then it would reduce our import bill to some extent.

Structure of Inflation-Indexed Bonds

First tranche of Series I IIBs will be issued by the RBI on June 4, 2013 and it will carry a fixed real coupon rate which will be announced by the RBI in due course. The principal on the IIBs will be indexed to inflation and the coupon will be calculated on the indexed principal. So, the investors will receive inflation-adjusted interest payments periodically on the indexed value of their initial investment.

At the time of maturity also, the investors will get inflation-adjusted principal repayments or their original principal investments, whichever is higher.

Unlike many other countries where the CPI is widely used, the RBI has decided to use the final inflation numbers based on the wholesale price index (WPI) for setting the coupon rate on IIBs. As per the RBI – â€œUnavailability of a single CPI representing the consumption basket of all sections of society in India renders it impractical to be used in indexation of IIBsâ€. In the past also, WPI was used for indexing the capital indexed bonds (CIB) wherein principal was indexed at the time of redemption.

RBI has also announced that the final WPI inflation numbers with four months lag will be used as the reference WPI inflation. This is because many a times final WPI deviates widely from the provisional WPI, with even directional changes.

At present, the Office of the Economic Adviser, Ministry of Commerce and Industry, GoI releases the â€˜provisionalâ€™ inflation numbers based on WPI with a lag of two weeks and â€˜finalâ€™ inflation numbers based on WPI with a lag of two and a half months. For instance, provisional inflation numbers for May 2013 and final inflation numbers for March 2013 would get released on June 14, 2013. So, for indexation purposes in IIBs, final WPI inflation of May 2013 and June 2013 will be used as the reference WPI inflation for 1st October, 2013 and 1st November 2013, respectively.

How exactly it works

For example, assume an IIB issued at a face value of Rs. 1000 with a real coupon rate of 3% paid annually. If the annual inflation comes out to be 5% at the time of coupon payment, the principal of the bond would be re-calculated as Rs. 1050 and the coupon payment would be Rs. 31.50 i.e. Rs. 1050 * 3%.

Inflation-Indexed Bonds (IIBs):

Face Value: Rs. 1,000

Real Coupon Rate (or Inflation-Adjusted Coupon Rate): 3% per annum

Inflation at the time of Coupon payment: 2% or 5% or 8% (Three Scenarios)

Coupon Payment (in Rs.): [1,000*(1+2%)]*3% = Rs. 30.60 (or 3.06% on Rs. 1,000)

Coupon Payment (in Rs.): [1,000*(1+5%)]*3% = Rs. 31.50 (or 3.15% on Rs. 1,000)

Coupon Payment (in Rs.): [1,000*(1+8%)]*3% = Rs. 32.40 (or 3.24% on Rs. 1,000)

On the contrary, if there is a deflation of 2%, the indexed principal would be Rs. 980 and the coupon payment would be Rs. 29.40 i.e. Rs. 980 * 3%. However, at the time of maturity, as the principal to be received back can’t be less than the original face value of Rs. 1000, so it would either be the face value of the bond i.e. Rs. 1000 or a higher market price.

Index ratio (IR): Index Ratio will be used for indexation of the principal amount and will be computed by dividing reference index for the settlement date by reference index for issue date (i.e., IR set date = Ref. Inflation Index Set Date / Ref. Inflation Index Issue Date).

Tenors of the IIBs: First tranche of Series I will be issued for a tenor of 10 years, which is considered as the benchmark period in most of the dated securities. It is expected to have different maturities later on.

Issue Size: RBI plans to issue IIBs of Rs. 12000-15000 crore this financial year in various tranches and each tranche will be for Rs. 1000-2000 crore.

Reserved portion for Retail Investors: 20% of the issue size in the first tranche has been reserved for the retail investors. Series II of IIBs is expected to be announced in October, which will encourage exclusive participation from the retail investors.

At this juncture, it makes sense for the govt. to issue IIBs and it would help investors also in diversifying their asset portfolios. Moreover, investors will be able to participate in more productive assets rather than gold, which has cut down the financial savings dramatically. But, it remains to be seen how these bonds would evoke response from the investors this time around

Also read Deepak Shenoy’s post on Inflation Indexed Bonds as that has some good thoughts as well.

Interest Rates on Post Office Small Saving Schemes – FY 2013-14

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

Interest rates on most of the Post Office small saving schemes have been reduced by 10 basis points (bps) or 0.10% effective April 1, 2013. The change has become an annual exercise now and it gets announced in March every year. Here is the link to the statement issued by the finance ministry on Monday, March 25th.

Except 1-year time deposit, all other saving schemes will now carry 0.10% lower rate of interest. Your Public Provident Fund (PPF) account will now earn you 8.70% per annum tax-free rate of interest as against 8.80% earlier. 5-year and 10-year National Savings Certificates (NSC) will now carry interest rates of 8.50% and 8.80% per annum respectively, as against 8.60% and 8.90% now.

Post Office Monthly Income Scheme (POMIS) will also earn you lower at 8.40% vs. 8.50% earlier. The interest rate on Senior Citizens Savings Scheme (SCSS) also stands reduced to 9.20% as against 9.30%.

Here is the table having the interest rates applicable for FY 2012-13 and FY 2011-12:

Interest rate differential between PPF and Tax-Free Bonds

Tax-free bonds as a fixed income investment have become reasonably popular among investors now and since the interest income earned on both tax-free bonds and PPF is tax-free, most financial advisors/analysts compare these two instruments before recommending it to their clients.

Till financial year 2011-12, PPF was fetching 8.60% per annum which got increased to 8.80% per annum effective April 1, 2012 and at the same time, tax-free bonds were getting issued at 8.30% per annum. So, the interest rate differential was only 0.30% which made tax-free bonds a very attractive investment avenue for high net worth individuals (HNIs).

Now, the interest rates on tax-free bonds have fallen to approximately 7.50% per annum as compared to PPF which will now yield 8.70% effective April 1, 2013. This has increased the interest rate differential to 1.20% and hence makes PPF the best fixed income investment for most of the individual investors.

Honestly speaking, I was expecting the interest rate on PPF to fall below 8.50%. As an investor, it is a pleasant surprise to still get 8.70% on PPF but as an Indian and as an equity investor in Indian stock markets, I am disappointed as I think the interest rates have been set on a higher side and it is going to put one more strain on the finances of Indian government. It makes me think again if the government is still serious about containing its fiscal deficit or it wants to keep everybody silent one year before the elections, ignoring its already bad financial condition.