Month: August 2012

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 [email protected]

India Infoline Finance Limited (formerly known as India Infoline Investment Services Ltd.) will be launching its second issue of non-convertible debentures (NCDs) from September 5, 2012. To keep things absolutely clear right from the beginning, I’ll use IIFFL as the short name for this company as I want to distinguish this company from its well known listed parent company, India Infoline Limited (IIFL), and advise the readers not to confuse this issue as the issue launched by the parent company IIFL.

About India Infoline Finance Limited

India Infoline Finance Limited is a credit and finance arm of the IIFL group and provides loans against property, housing loans, gold loans, loans against securities/margin financing and medical equipment financing to the corporates, high networth individuals (HNIs) and retail clients. One of its subsidiaries, India Infoline Distribution Company Limited, is also engaged in the business of distribution of financial products like mutual funds, insurance products, company fixed deposits, NCDs, National Pension System (NPS), IPOs etc.

The company was originally incorporated on July 7, 2004 as a private limited company which leaves this company with a very short operating history and unproven business track record.

Financials of the company

During the year ended March 31, 2012, the loan book of the company stood at Rs. 6,746 crore as against Rs. 3,288 crore, an increase of approximately 105%. This jump has been achieved mainly on account of mortgage loans and gold loans which constitute approximately 45% and 41% of the total loan book respectively. The mortgage loan book is contributed by loan against property (LAP) at 89% and home loans at 11%. These figures suggest that the company is primarily focusing on gold loans as the new business segment and LAP in the housing loan segment.

IIFFL reported revenues of Rs. 953 crore in FY12 as against Rs. 520 crore in FY11, a jump of almost 83%. It also reported 76% increase in its net interest income (NII) to Rs. 412 crore in FY12 from Rs. 234 crore in FY11 mainly on account of a 105% increase in its lending book. Gross NPAs and Net NPAs of the company stood at 0.61% and 0.44% respectively as on March 31, 2012 as against 0.37% and 0.30% respectively as on March 31, 2011.

The company has made a significant branch expansion in the gold loan business last year which resulted in 79% increase in its operating costs to Rs. 297 crore in FY12 as compared to Rs. 166 crore in FY11. This resulted in a very tepid improvement of 14% in company’s net profit after taxes (PAT) which stood at Rs. 105 crore in FY12 as compared to Rs. 92 crore in FY11.

Here is the link to check the latest audited financial results of the company ending March 31, 2012.

About the NCD Issue

The size of this NCD issue is Rs. 500 crore including a green-shoe option of Rs. 250 crore. The company plans to use the proceeds for various financing activities including lending and investments, to repay existing loans, for capital expenditures and other working capital requirements.

The bonds offer a coupon rate of 12.75% per annum in three different options – payable monthly, payable annually and cumulative annually payable on maturity. Unlike Shriram Transport Finance NCD, this issue will not offer any additional incentive to the retail investors and the same rate of interest will be offered to all the categories of investors. This uniform rate of interest should make it attractive for the Category I – institutional investors and Category II – non-institutional investors. Under the cumulative interest option, the investors will get Rs. 2054.50 at the time of maturity. The maturity period in all the three options will remain 72 months only.

The interest earned will be taxable as per the tax slab of the investor but the company will not deduct any TDS on it as is the case with all of the listed NCDs taken in a demat form. The company has decided to keep the minimum investment requirement of Rs. 5,000 (or 5 bonds of face value Rs. 1,000) which has made it easily investable from the small retail investors’ point of view.

Like most of the NCDs, these bonds are going to list on both the stock exchanges – NSE and BSE. Investors will have the option to apply these bonds in physical form also.
25% of the issue is reserved for the “Reserved Individual Portion” i.e. for the individual investors investing up to Rs. 5 lakhs and another 25% of the issue is reserved for the “Unreserved Individual Portion” i.e. for the individual investors investing above Rs. 5 lakhs. 40% 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.

IIFFL is a relatively new company with a limited operational track record. The issue has been rated ‘AA-/Stable’ by CRISIL and ‘AA- (Stable)’ by ICRA. One notable point I want to emphasise here is that unlike last year and unlike all NCD issues of the past, these NCDs qualify as “Unsecured Redeemable Subordinated Debt” in nature or in other words, in the event of default, no charge upon the assets of the company would be created in connection with these NCDs.

I’ve picked this text from the DRHP

“The NCDs will be in the nature of subordinated debt and hence the claims of the holders thereof will be subordinated to the claims of other secured and other unsecured creditors of our Company. Further, since no charge upon the assets of our Company would be created in connection with the NCDs, in the event of default in connection therewith, the holders of NCDs may not be able to recover their principal amount and/or the interest accrued therein in a timely manner, for the entire value of the NCDs held by them or at all. Accordingly, in such a case the holders of NCDs may lose all or a part of their investment therein. Further, the payment of interest and the repayment of the principal amount in connection with the NCDs would be subject to the requirements of RBI, which may also require our Company to obtain a prior approval from the RBI in certain circumstances.”

Though this feature should not make this issue an untouchable one to invest in but the investors should exercise extreme caution while investing in such issues as extreme adverse business conditions related to gold loan business or housing loan business might put IIFFL’s fortunes in trouble and it would become difficult for the investors to recover their hard earned money in the form of investment.

The issue closes on September 18, 2012.

Performance of the bonds issued last year

As I mentioned in the Shriram Transport Finance NCD post also, as many as ten such NCD issues had hit the markets last year issued by companies like Shriram Transport Finance, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, Religare Finvest and India Infoline Investment Services Ltd. All the issues, except Shriram Transport Finance NCDs, listed at a discount and that too at a very deep discount of 5-8% in some cases. Many of them have still not been able to recover from those losses. They are yielding higher than 13% even now.

NCDs issued last year by IIFFL offering 11.90% coupon were secured in nature and are currently yielding 13.75% under the 60 months reserved individual option with the price quoting at Rs. 1001.10. It is the most traded option among all the options offered last year.

Next 20-30 days will witness three more such NCD issues seeking your investment offered by Shriram City Union Finance, Muthoot Finance and Religare Finvest. These companies have already filed their respective draft red herring prospectus (DRHP) with SEBI and almost all the regulatory formalities have been completed. Let us see how these NCDs perform once they get listed and if they are able to give any kind of much needed relief from the sinking stock prices or escalate our pain by listing at a discount again.

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 [email protected]

Continuous volatility in the stock markets coupled with bad macro-economic data, high inflation numbers and unclear government policies have forced many investors to shift their investments from equity to fixed income instruments like tax-free bonds, non-convertible debentures (NCDs), bank fixed deposits and company fixed deposits. Whereas bank fixed deposits barely manage to beat inflation, some investors always remain on the lookout for higher returns from company fixed deposits.
A few days ago, one of the readers, Vimal Raj, put up a query regarding fixed deposit offering from Hawkins. Here is the quote Vimal Raj left under Suggest a Topic:

“In today’s ET, I read that Hawkins is open for Fixed deposit. Is it worth to invest in? And why they are offering fixed deposit rather than bonds?”

Here is my effort to make the readers know some of the details about company fixed deposits and what you should be looking for before making an investment.

Not all companies can accept public deposits. Government companies, manufacturing companies, housing finance companies (HFCs), financial institutions and non-banking financial companies (NBFCs) registered under the Companies Act 1956, have been authorized to offer fixed deposits. Whereas bank fixed deposits are covered by a guarantee from the Deposit Insurance and Credit Guarantee Corporation of India, which assures repayment of Rs. 1 lakh in case of any default by a bank, but there is no such guarantee for company deposits.

However, if any company including an NBFC or HFC defaults in repayment of deposit, the investor can approach Company Law Board (CLB) or consumer forum or file a civil suit in a court of law to recover the deposits.

Who regulates company fixed deposits?

Factors that investors should be looking for before investing in company fixed deposits:

Credit Rating: It goes without saying that safety of the principal amount is the most important factor that any investor would consider before seeking a higher return. It will take you 10 years to recover your principal amount if you risk your investment with a company likely to default but offering 12.5% return vis-a-vis a financially sound company offering 10% return.

Reserve Bank of India (RBI) and National Housing Bank (NHB) have made it mandatory for NBFCs and HFCs such as HDFC, Shriram Transport Finance etc. to have at least ‘A’ rating to be eligible to accept public deposits. Whereas HDFC deposits have been rated ‘FAAA’ by CRISIL and ‘MAAA’ by ICRA, ICRA has granted a rating of ‘MAA’ to Canfin Homes for securing these deposits. As per CRISIL, ‘AAA’ rating implies that the company has the highest credit quality and the lowest credit risk. All the companies which get their fixed deposits rated by the rating agencies are required to clearly display the given rating on their application forms.

Credit risk is the biggest risk for fixed deposit investors. Investors should not get too greedy for high interest rates while looking to invest in fixed income instruments rather they should focus on 4 C’s of credit analysis – capacity, collateral, covenants and character of the issuer.

Capacity is the ability of a borrower to repay its obligations. Investors should primarily focus on the financial condition and past track record of the company before committing their hard earned money into these deposits.

Collateral represents assets that the company pledges as an alternate repayment source against the deposits. I have no idea which companies in India offer collateral while accepting public deposits for the safety of investors’ money. If any reader has an idea about any such company then please let me know.

Covenants are the terms and conditions of the lending agreements. Covenants are essentially restrictions on the company to ensure its financial position remains under check and help minimise the risk to the depositors.

Character refers to the credit history of the borrower. It is very important to check how efficient the management of the company is and how prompt the company is towards the payment of periodic interest, maturity proceeds and issuing investment certificates. You must ask your financial advisor or the servicing agent all these things before deciding the company to invest. My personal experience with HDFC was quite satisfactory whereas it was not very good with Jaiprakash Associates and Unitech.

Financials: Securing a rating is not mandatory for non-finance companies. So, in their case, the investors need to check their balance sheets, profit & loss accounts and cash-flow statements in order to understand how the company would generate the money to make the interest payments and principal repayments.

Rate of Return: Presently, the maximum rate of interest any company can offer is 12.5%. Observing the returns these companies are offering at present suggests that in most of the cases the safer the deposits are, the lower the returns will be but it is not always the case. It is natural to consider the term deposits offered by the government organizations to be the safest, probably that is why their returns are also lower. The investors need to make a balance between the risks and the returns.

Here is a list of the major company fixed deposits that are open to investors right now.

Liquidity: As per deposit regulations, companies in India cannot accept demand deposits. A deposit which is immediately withdrawable on the depositor’s demand is called a demand deposit. There is a lock-in period of 3 months during which the investors cannot ask for a withdrawal of their investment except in the event of the death of the depositor. If you go for a withdrawal between 3 months and 6 months of making the investment, no interest is paid. Thereafter there is a penalty of 1% if you go for a premature withdrawal.

As per the RBI and NHB regulations, minimum period of deposit cannot be shorter than 12 months and maximum period of deposit cannot be greater than 60 months in case of NBFCs and 84 months in case of HFCs. For manufacturing companies, the minimum period cannot be shorter than 6 months and the maximum period cannot be greater than 36 months.

Tax Implications: The interest income earned on a company deposit is taxable at the same tax slab as the investor is in and is added to the income under the head “Income from Other Sources”. Tax will be deducted at source @ 10.30% whenever the interest income exceeds Rs. 5000 in a financial year, in accordance with section 194 A of the Income Tax Act, 1961.

Floating Rate Option: Suppose you take a floating rate home loan at 10.25% and after 6 months, the housing finance company announces an increase in its lending rate by 0.75%, the applicable rate on your home loan automatically becomes 11%. Have you ever heard of any bank or a company offering a similar benefit on your fixed deposit? I did not till the time I visited the website of EXIM Bank of India. This is a unique feature of the term deposit scheme offered by this bank. Suppose you do a fixed deposit of 36 months with the EXIM Bank at 9.25% and after 12 months the bank decides to increase the rate to 10% for the same maturity, the applicable rate on your deposit will automatically become 10% for the residual period of investment.

Moreover, if the existing rate on a deposit, say 9.25% (contracted based on original maturity at the time of placing deposit), is higher than the revised rate applicable for the residual tenor, say 8.50%, then the original higher rate of 9.25% would continue to apply.

Coming back to Vimal Raj’s query, I could not find any details of the fixed deposit scheme offered by Hawkins Cookers Ltd. anywhere, not even on the company’s website and annual report. So, I’ll not be able to comment on that.

RBI may not be in a mood to cut the interest rates and concede against the spiraling inflation, but if we observe the recent actions taken by some of the big banks including SBI etc., returns on some of the fixed income instruments should soon begin their journey downwards. So, if you find these rates attractive enough to park your money from risk-return perspective then you should lock into these deposits soon before they start falling.

To be posted soon: “Company Fixed Deposits – Should You Invest?”