Category: Fixed Deposits

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

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

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

Of late, the market has been flooded with fixed maturity plans (FMPs). In fact, I have never seen such a huge number of FMPs getting launched in such a short span of time and that too with a variety of tenors going up to 5 years.

Mutual Fund houses, which have seen a big dip in their assets under management (AUMs) in the past couple of months due to huge outflow of money from their debt fund schemes, especially liquid funds, do not want this money to flow out of the mutual fund industry.

As the short-term interest rates have risen quite sharply during this period, these mutual fund companies are launching FMPs of shorter duration, like one month and three months and also of one year, in huge numbers with quite attractive indicative yields.

What is so attractive about these FMPs?

High Interest Rates: As mentioned above, fixed maturity plans are offering high indicative yields these days due to a sudden spike in interest rates, especially short-term interest rates. Though the market regulator SEBI has disallowed it to disclose the indicative yields of FMPs, some of the fund houses are privately quoting it to be in the range of 9.60% to 10.60% for 1 year period, which is quite attractive.

Ranged Indicative Yield: FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), NCDs and other securitized debt. As per SEBI regulations, an FMP cannot invest its money in instruments with maturity greater than the maturity of the FMP itself. Also, the mutual fund companies need to disclose it in the scheme’s offer document, in which all instruments it is going to invest the scheme’s corpus.

So, taking a cue from its planned investment in these instruments, the management team of an FMP is able to provide an indicative yield to be expected out of this scheme. The returns at the time of maturity are very close to this indicative yield, if the scheme does not suffer any credit default. So, unlike open ended mutual fund debt schemes like gilt funds, income funds or short-term funds etc., there is no uncertainty with regards to the holding period returns of these FMPs.

Fixed Maturity: As FMPs are closed-ended funds and get matured after some definite maturity period, their investors know well in advance when they are going to get their money back. Like bank fixed deposits, there is no uncertainty with regards to their holding periods.

Taxation Rules for FMPs – Before I proceed further with the positive points of FMPs, we first need to know the taxation rules applicable to FMPs.

Growth Option – FMPs, if held for more than one year, would fall under long-term capital gain tax and are taxed at 20% with indexation or 10% without indexation, whichever is less. If the holding duration is equal to or less than one year, then FMPs would attract short term capital gain tax and will be taxed at the slab rate of the investor.

Dividend Option – Dividends announced by the mutual fund houses for these FMPs are tax-free in the hands of the investors, but are subject to dividend distribution tax (DDT) of 28.325% i.e. 25% tax + 10% surcharge + 3% education cess.

Indexation or Tax Benefits: ‘Indexation’ or ‘Double Indexation’ benefit is one thing which makes these FMPs score highly over bank fixed deposits. Double-Indexation benefit accrues to those FMPs which run over to 3rd financial year. If an FMP is bought at the lag end of 1st financial year and gets matured in the beginning of 3rd financial year, then it makes your capital gains virtually tax-free.

Let me explain it to you: Say, you invest in an FMP at the NAV of Rs. 1,000 on September 5, 2013 and it matures on April 5, 2015, earning for you a return of say 15% in one and a half years. Cost inflation index for 2013-14 is ‘939’. Let us assume it comes out to be ‘1014’ for 2014-15 at 8% inflation and ‘1085’ for 2015-16 at 7% inflation. Then, your indexed cost of acquisition for your FMP would be Rs. 1,000 * 1,085 / 939 = Rs. 1,155 and the long term capital loss would be Rs. 1,155 – Rs. 1,150 = Rs. 5. So, there is no need to pay any tax on the gain of Rs. 150.

Even single indexation benefit makes taxation of these FMPs quite favorable and quite close to getting tax-free, if your holding period is close to 1 year plus i.e. 370 days or 368 days or 371 days etc.

Taking the above case forward for single indexation benefit, let us take the maturity date to be September 10, 2014 and one year return to be 10%. Cost of acquisition comes out to be Rs. 1,000 * 1014 / 939 = Rs. 1,080 and the long term capital gain would be Rs. 1,100 – Rs. 1,080 = Rs. 20. On this investment, capital gain tax would be either Rs. 4 i.e. 20% of Rs. 20 or Rs. 10 i.e. 10% of Rs. 100, whichever is less. So, the tax is Rs. 4 and your effective return would be 9.60%.

Factors to keep in mind while investing or selecting a fixed maturity plan (FMP) – Though FMPs are launched by different fund houses and probably have similar maturity period, say 370 days, but their portfolio investments may differ quite a lot. Here are the pointers which you should keep in mind while going for an FMP:

Where your money is getting invested – It is very important to know to whom your money is getting lent. This is what the scheme’s fund management is doing on your behalf. As per the SEBI regulation, the scheme’s offer document must have the details about the type of securities it intends to invest into.

As the corporate profitability is on a decline amid economic gloom, FMPs have started avoiding the riskier sectors in which they foresee some probability of a credit default, like real estate, airlines, gems and jewellery etc.

Credit rating of the securities – You should also check the scheme’s offer document for the minimum credit rating of the securities the fund management intends to invest into. The investors should also note that the higher the credit ratings of their securities, the lower the returns would be for the FMPs.

FMPs of shorter duration, like 30 days, 90 days or up to 370 days, typically invest in CDs issued by some of the banks or CPs issued by some of the corporates. FMPs of longer duration, like 1875 days, 1820 days or 1095 days, typically invest in NCDs issued by some of the corporates. CDs are considered the safest among these instruments as many of these CDs get issued by PSU banks and normally carry higher credit ratings like ‘AAA’ or ‘AA+’ depending on the issuer banks. CPs and NCDs normally carry lower credit ratings of ‘AA’ or ‘AA-’.

Let us take a look at the “Intended Portfolio Allocation” of Birla Sun Life Fixed Term Plan – Series HV, an FMP of 368 days, opened on September 2nd and closes on September 5th.

Expense Ratio of the scheme – These days mutual fund houses are attracting distributors to promote their long-term FMPs by offering them high distribution commissions. These high commissions they do not pay from their own pockets. These are charged from the investors’ money only. So, you should select a scheme which has a reasonable expense ratio as per the tenor of the FMP.

FMPs are tradable but closed-ended schemes – As per SEBI regulation, FMPs now get listed on the stock exchanges and are tradable at their respective NAVs. But, as there is not enough number of interested buyers and FMPs are closed-ended schemes, FMPs normally trade at a discount to their fair values and this should be kept in mind while investing in FMPs. Investors should choose these FMPs as per their time horizon and then should stay invested till their maturity to realize their full potential.

Investor’s Tax Bracket – Investors with zero tax liability or who are in the 10% tax bracket do not gain much from the tax differential between FMPs and FDs and that is why it is better for them to invest in FDs or NCDs themselves as compared to FMPs. It is the investors in the 30% or 20% tax bracket who gain maximum by investing in FMPs.

Equity markets are extremely volatile and interest rates are ruling higher, these two things set a perfect pitch for FMPs to gain investors’ confidence. But, turbulent times can affect financial condition of corporates quite badly and force some of them to default on their credit payments. So, it is always advisable to the investors to keep their portfolios well diversified with investments in various asset classes and also sub-heads of those asset classes.

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

Muthoot Finance has also launched its issue of non-convertible debentures (NCDs) from September 2nd, with its plan to raise Rs. 300 crore, including the green-shoe option of Rs. 150 crore. The issue will remain open for two weeks and will get closed on September 16th. However, if required, the company may extend the closing date of the issue, depending on the response for the issue.

The company offers to double your money in 72 months (or 6 years) with an effective yield of 12.25% per annum. This is just one of the eleven options that the company is offering to the investors, with different maturities and different interest payments.

Interest rates have been left equal for all the categories of investors and there is no differentiation among institutional, non-institutional, HNIs and the retail investors categories. The bonds will be issued for a tenor of 400 days, 24 months, 36 months, 60 months and 72 months, with monthly interest, annual interest and cumulative interest options.

I don’t know why the company is giving so many options and making it too complicated for the investors to take a decision, but it does not give me any confidence to know that the bonds, which are offering to double the money in 72 months, are actually ‘unsecured’ in nature.

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

Category I – Institutional Investors – 15% of the issue is reserved

Category II – Non-Institutional Investors, corporates & HNIs – 35% of the issue is reserved

Category III – Retail Individual Investors including HUFs – 50% of the issue is reserved

NCDs will be allotted on a “first-come-first-served” basis.

Ratings & Nature of NCDs – There are two rating agencies involved in this issue – CRISIL and ICRA and both have assigned ‘AA-/Negative’ rating to this issue. Except the XIth option, all other options are ‘secured’ in nature.

Listing, Demat & TDS – These NCDs are proposed to be listed only on the Bombay Stock Exchange (BSE). Investors have the option to apply these NCDs in physical form as well as demat form for the first six options out of total eleven. NCDs applied under option VII, VIII, IX, X and XI will be allotted compulsorily in the demat form.

Again, 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 – As with SREI Infra NCDs issue, this issue as well requires an investor to put in a minimum investment of Rs. 10,000 i.e. at least 10 bonds of face value Rs. 1,000. I don’t know why these private companies want it to be Rs. 10,000, when PSUs, like REC etc., are keeping their minimum investment requirement at Rs. 5,000.

With the gold prices rising, then falling and then artificially pushed up higher again due to higher import duty and falling value of the Indian currency, I think it is very difficult to analyse the future of gold prices and the growth pattern of the gold finance companies like Muthoot Finance, Manappuram Finance etc.

Though the interest rates are somewhat attractive, I would stay away from such NCD offerings for my personal investments and put my money either in tax-free bonds or tax efficient debt mutual funds including fixed maturity plans (FMPs).

Link to Download the Application Forms

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.

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

 

The Airport Authority of India (AAI) is going to issue tax free bonds to the tune of Rs. 1,000 crores shortly, and AAI is going to be the first company in a while to issue tax free bonds.

I think the primary reason for this is that the yield on these bonds is capped to the yield on Government securities of equal duration, and those yields dipped earlier this year.

As Shiv wrote a few days ago these yields are rising back again (Read: Why government bond yields have suddenly started rising?), and I feel that you can expect a rate of around 7.5% for a 10 year bond when AAI issues these tax free bonds.

Since AAI is a mini ratna, and a government owned company, there is some sort of an implicit guarantee that the government will honor AAI’s bondholders in case it falls into trouble so then the question of whether to invest in this issue will be driven primarily by how much interest rate they can offer, and since that interest rate can’t be more than the equivalent G-Sec yield, you have a fair idea on how much that yield is likely to be as well.

At around 7.5% – the tax free rate will be definitely lower than rates offered by bank fixed deposits, but then of course those aren’t tax free. I think you’d be able to get about a percentage or slightly more in a good bank for a comparable duration.

If you buy debt mutual funds right now then there is a risk that they go down in value as the yields go higher, and the listed bonds are already trading at a premium and we will have to compare their yield to this to see if AAI tax free bonds are lucrative or not.

Other than this, I can’t think of any other suitable comparisons, and I think if the yield is decent, this might present a good opportunity for investors to allocate some of their assets too.

I’ll have a more detailed post when the issue details are out, and if you have any particular things that you want to see covered in that post please leave a comment or if you have any thoughts on this please leave a comment.

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

Investors who invest in fixed income instruments, like fixed deposits, company deposits, NCDs, infrastructure bonds, tax-free bonds etc., eagerly wait for the day on which the interest payment gets credited into their bank accounts. For some of the investors, this interest income is a substantial portion of their annual income. So, they need to know the exact date of their interest payments, especially with those investments with which they are not much familiar. Tax-Free bonds also fall into that category of investments for which investors keep asking for more information.

Ramesh wanted to know the date on which HUDCO would be paying its first annual interest.

Ramesh  July 3, 2013 at 12:12 am

When will Hudco pay the annual interest on their1 2013 tax free bonds.

Karthik also wanted to know if there is any website which carries such information at a single place.

Karthik Reddy Chintaparthi  July 3, 2013 at 8:39 am

How can we keep track of the interest these companies pay ? Any online website ?? Please confirm.

National Stock Exchange (NSE) website has a list of all the bonds and NCDs which are listed on its exchange and get traded on a regular basis. Here is the link to the list of bonds which get traded on the Capital Market (CM) segment of NSE.

But this link also does not have all the interest payment dates on a single page. If any of you want to check the next interest payment date of any of your tax-free bonds, then you are required to click on the name of the company from this list, select the ‘Series’ of the bond and click on the Securities Information tab. Next IP Date is the information that you were seeking.

I am not aware of any such link of BSE which lists all the BSE-listed bonds/NCDs on a single page. So, you are required to check your bond holding with its BSE Code and you need to repeat the process if you are holding multiple bonds.

When I could not thought of any such source which has all the dates for all such issues, I decided to write this post having all the interest payment dates for all the tax-free bonds which got issued during FY 2011-12 and 2012-13.

During FY 2011-12, five public sector undertakings (PSUs) issued tax-free bonds – National Highway Authority of India (NHAI), Power Finance Corporation (PFC), Indian Railways Finance Corporation (IRFC), Housing and Urban Development Corporation (HUDCO) and Rural Electrification Corporation (REC).

During FY 2012-13, nine PSUs issued such tax-free bonds – PFC, IRFC, HUDCO, REC, India Infrastructure Finance Company Limited (IIFCL), Ennore Port, Dredging Corporation, National Housing Bank (NHB) and Jawaharlal Nehru Port Trust (JNPT). NHAI decided to give it a miss last year as it did not require any additional funding.

Here is the table carrying the interest payment dates for all of the tax-free bonds issued by these companies.

Tax-Free Bonds Issued During Financial Year 2012-13

Tax-Free Bonds Issued During Financial Year 2011-2012

If any of you want to know the interest payment dates of infrastructure bonds issued during 2011-12, please check this link.

Tax-Free Bonds in Physical Form – If you had taken these tax-free bonds in the physical form, then you must have given a cancelled cheque of your bank account along with your PAN card copy and the address proof. Your interest payment gets credited directly into the same bank account, of which you gave the cancelled cheque.

Tax-Free Bonds in Demat Form – If you had taken these bonds in your demat account, then the company will credit the interest payment directly into your bank account which is currently linked to your demat account.

If you have any query regarding any of your interest payment related issues, you should contact the respective Registrar at the contact numbers mentioned in the table above.

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 “next to none” 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 investors’ investments against high inflation and lower the gold demand here in India.

As per the Economic Survey of 2013: “Gold 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.”

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 government’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 investors’ 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 – “Unavailability of a single CPI representing the consumption basket of all sections of society in India renders it impractical to be used in indexation of IIBs”. 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 ‘provisional’ inflation numbers based on WPI with a lag of two weeks and ‘final’ 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.

 

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.