Muthoot Finance NCDs Issue – September 2013

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at 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).

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