Shiv Kukreja – Page 5

Edelweiss Retail Finance 9.25% Non-Convertible Debentures (NCDs) – March 2018 Issue

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

Edelweiss Retail Finance Limited, a company acquired by Edelcap Securities in 2012, is launching its public issue of secured and redeemable non-convertible debentures (NCDs) from the coming Wednesday, March 7. The issue will offer an effective yield of 9.25% for 10 years, 9% for 5 years and 8.75% for a period of 3 years from deemed date of allotment with monthly and annual interest payment options. The issue is scheduled to remain open till March 22, unless the company decides to close it prematurely due to oversubscription or due to any other reason mentioned in its offer document.

Size & Objective of the Issue – Edelweiss Retail plans to raise Rs. 500 crore from this issue, including the green shoe option of Rs. 250 crore. The company plans to use at least 75% of the issue proceeds for its lending activities and to repay its existing loans and up to 25% of the proceeds for general corporate purposes.

Coupon Rate & Tenor of the Issue – The company has decided to issue its NCDs for a duration of 3 years, 5 years and 10 years. For 3 years, the company is offering 8.75% p.a. payable annually and 8.42% p.a. payable monthly. For 5 years, the coupon rates are 8.65% p.a. and 9% p.a. and for 10 years, these rates are 8.88% p.a. and 9.25% p.a. respectively.

Minimum Investment – Investors need to apply for a minimum of ten bonds of Rs. 1,000 face value in this issue i.e. an investment of Rs. 10,000 at least.

Categories of Investors & Allocation Ratio – The investors have been classified in the following four categories and each category will have the below mentioned percentage fixed in the allotment:

Category I – Institutional Investors – 20% of the issue i.e. Rs. 100 crore

Category II – Non-Institutional Investors – 10% of the issue i.e. Rs. 50 crore

Category III – High Networth Individuals (HNIs) – 20% of the issue i.e. Rs. 100 crore

Category IV – Retail Individual Investors & HUFs – 50% of the issue i.e. Rs. 250 crore

Allotment will be made on a first-come first-served basis, as well as on a date priority basis i.e. on the date of oversubscription, the allotment will be made on a proportionate basis to all the applicants of that day on which it gets oversubscribed.

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

Credit Rating & Nature of NCDs – CRISIL and ICRA have rated this issue as ‘AA’ with a ‘Stable’ outlook. As mentioned above, these NCDs will be ‘Secured’ in nature.

Listing, Premature Withdrawal & Put/Call Option – These NCDs will get listed on both the stock exchanges i.e. Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). The listing will take place within 12 working days after the issue gets closed. Though there is no option of a premature redemption, the investors can always sell these bonds on the exchanges. The company too does not have the option to ‘Call’ these NCDs during the tenure of these NCDs for which they are issued.

Demat & TDS – Demat account is not mandatory to invest in these bonds as the investors have the option to apply these NCDs in physical form as well. Also, though the interest income would be taxable with these bonds, NCDs taken in demat form will not attract any TDS.

Financials of Edelweiss Retail Finance Limited

(Note: Figures are in Rs. Crore, except percentage figures & Debt to Equity Ratio)

Should you invest in Edelweiss Retail Finance NCDs?

Like I expressed my views about SREI Infrastructure Finance NCDs last week, for this issue too, I think the interest rates on offer fall at least 50 basis points (or 0.50% p.a.) short of my expectations. Despite of the fact that the interest rates this issue is carrying are still higher than almost all of the bank fixed deposits, these rates are not attractive enough for me to put my money in these NCDs. In a rising interest rate scenario, these companies should have offered higher rates in order to compensate higher risk they carry and also to make up for higher expected rates in future.

But, in the absence of a better alternate investment option, where should we invest our money? If you think that the worst of demonetisation and GST implementation is behind us and our macroeconomic numbers will improve from hereon, then probably it is time that we should move our money to either medium-term debt funds or long-term gilt funds. However, if you have a view that our economic recovery is still somewhat far from the desired levels, then it would be better to stay invested in short term funds, liquid funds or bank FDs.

However, investors, with an appetite to absorb somewhat higher risk and who have a view that the bond yields have peaked in the short term, can consider investing in this issue, but only for 3 years or 5 years. Investing for 10 years with a private issuer should be best avoided.

Application Form – Edelweiss Retail Finance NCDs

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in Edelweiss Retail Finance NCDs, you can reach us at +91-9811797407

Tax Benefits with Personal Loans

Yes, you read it right. You can enjoy certain tax benefits with personal loans as well. Since it is a tax saving season, undoubtedly, it seems a big news for people who are looking for ways to save taxes! However, the tax benefit would depend on the final use of the personal loan.

Before we discuss the tax benefits available, let’s discuss what a personal loan entails. A personal loan is considered to be one of the easiest ways to get the money, which can be used for any purpose. Both banks and non-banking financial institutions (NBFCs) offer personal loans with minimum documentation and easy repayment schedule. It can be availed online as well.

Tax Benefits of Personal Loans

As per our income tax laws, there is no specific tax deduction for a personal loan. However, in order to get tax benefits on a personal loan, the purpose for which the loan has been used does get considered. It means, if a personal loan has been taken and used for the ultimate purpose for which the tax deduction is available, the borrower becomes eligible to get a tax benefit, else it would not be given.

Usually, tax benefits on personal loans would be applicable if the online personal loan amount has been used for the below purposes:

Loan amount used for purchasing/constructing a residential house – If you take a personal loan for purchasing or constructing a house, you would be eligible for a tax deduction under section 24(b) of the Income Tax Act against the interest portion of your loan repayment. While for a self-occupied house, interest amount up to Rs 2 lakh can be claimed as tax-deduction, in case of a rented property, the entire interest paid on a home loan is eligible for the tax benefit. Further, if the loan amount is used towards paying the down payment, it would also get tax benefits. Similarly, the interest paid on the home improvement loan gets a tax deduction for up to Rs. 30,000.

Remember, the tax benefit is available only on the interest paid and not on the repayment of the principal amount. Having said that, it’s worth mentioning that a borrower has to give adequate proof to tax authorities to validate that the online personal loan money has been used to buy and renovate/repair the house.

Loan amount invested in business – If the online personal loan amount has been used in the business, the interest paid on the loan would be considered as an expense, and thus, it would be deducted from the gross revenue. This, in turn, will help in reducing the net taxable profit of the business, thereby lowering the tax liability.

Loan amount used for buying the asset – If the borrower has used the personal loan to buy assets like jewellery, shares, non-residential house etc., the interest paid on loan would be added to the cost of acquisition of the asset. Though tax deduction would not be available immediately in the year in which the interest has been paid, it would be added to the cost of acquisition and would be available in the year the asset gets sold.

Important Things to Remember Regarding Tax Benefits on Personal Loans:

* When the lender disburses the personal loan amount, no tax would be levied in the hands of the borrower as the loan amount is not an income.

* To claim a tax deduction, it is essential to submit evidence to prove that the loan amount has been used for any of the above-listed purposes.

* Personal loans must have been availed from a valid source, like a bank or an NBFC, as loans from an unknown source may be considered as income and thus, will not be eligible for tax benefits.

* As tax benefit is available only on the interest portion of your home loan and not on the principal amount, a borrower needs to submit the interest certificate to get the tax incentive.

To conclude, with personal loans, you get the freedom to use the loan amount as per your wish without informing the lender. So, if you need money for any of the above mentioned purposes, just apply for a personal loan and don’t forget to avail tax benefits as well.

SREI Infrastructure Finance 9.50% Non-Convertible Debentures (NCDs) – February 2018 Issue

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

Low interest rates on bank FDs and post office small saving schemes has resulted in investors searching for higher yield fixed income options, including short term debt funds. One such investment option is available right now in the form of non-convertible debentures (NCDs) from SREI Infrastructure Finance Limited.

The issue opened on February 9, 2018 and is carrying a maximum of 9.50% per annum coupon rate. It will remain open for two more weeks to close on March 7, 2018. These NCDs are offering monthly, annually and cumulative interest payment options.

As we analyse it further, let us take a quick look at the salient features of this issue.

Size & Objective of the Issue – Base size of this issue is Rs. 200 crore, with a green-shoe option to retain an additional Rs. 1,800 crore, thus making it a Rs. 2,000 crore issue. The company plans to use at least 75% of the issue proceeds for its lending activities and to repay its existing loans and up to 25% of the proceeds for general corporate purposes.

Coupon Rate & Tenor of the Issue – The issue will carry a coupon rate of 9.50% p.a. payable on an annual or cumulative basis for a period of 10 years, 9% p.a. for a period of 5 years, 8.75% for 3 years and 8.50% for 400 days. For investors seeking regular income, monthly interest payment option is also available for a period of 3, 5 and 10 years. Though coupon rates will be lower with the monthly interest payment options, effective rates will be close to the coupon rates of annual interest payment options.

0.25% Additional Coupon for SREI Infra Shareholders, NCD Holders, Senior Citizens & Employees – Existing shareholders and NCD holders of SREI Infra, senior citizens aged more than 60 years of age and the employees of SREI Infra will be offered an additional coupon of 0.25% per annum. Record date for the payment of interest will be considered as the relevant date for these investors to be eligible for this additional rate of interest.

Minimum Investment – Investors are required to make a minimum investment of Rs. 10,000 i.e. ten NCDs of face value Rs. 1,000 each.

Category I – Institutional Investors – 20% of the issue i.e. Rs. 400 crore

Category II – Non-Institutional Investors – 10% of the issue i.e. Rs. 200 crore

Category III – Individual & HUF Investors – 60% of the issue i.e. Rs. 1,200 crore

Category IV – Trusts & Society Investors – 10% of the issue i.e. Rs. 200 crore

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

Credit Rating & Nature of NCDs – Rating agency Brickwork Ratings (BWR) has rated this issue as ‘AA+’. Debt instruments with such a rating are considered to have high degree of safety regarding timely payment of interest and principal. NCDs issued for 400 days, 3 years and 5 years are ‘Secured’ in nature and in case of any default on its payment of interest or principal, the bondholders will have the right on certain secured assets of SREI Infra. However, NCDs issued for 10 years are ‘Unsecured’ in nature.

Listing, Premature Withdrawal & Put/Call Option – These NCDs will be listed on both the stock exchanges i.e. Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). The listing will take place within 12 working days after the issue gets closed. Though there is no option of a premature redemption, the investors can sell these bonds on the stock exchanges.

Demat Not Mandatory – Demat account is not mandatory to invest in these NCDs as the investors will have the option to apply for these NCDs in physical or certificate form as well.

TDS – Interest income earned is taxable with these NCDs and the investors are required to pay tax on the interest income as per their respective tax slabs. TDS @ 10% will be deducted if these NCDs are held in physical/certificate form and annual interest income is more than Rs. 5,000. NCDs held in demat mode will not attract any TDS.

Should you invest in SREI Infrastructure Finance NCDs?

Post the implementation of GST in July 2017, the government has reduced its rates from 28% to 18%, from 18% to 12% and from 12% to 5% on many of the items. Probably that is one of the primary reasons why GST tax collection has been below the government’s own estimates. Such shortfall in tax collection and lower than expected economic growth has put a lot of pressure on the government’s finances and thus resulted in a spike in bond yields. The benchmark 10-year G-Sec yield has jumped to 7.91% from a low of 6.1-6.2% post demonetisation.

In such a scenario, I would have liked SREI Infra to offer somewhat higher rate of interest in this issue. SREI Infra’s subsidiary, SREI Equipment Finance in its July issue offered relatively attractive rate of interest. Since then, bond yields have risen by at least 75 basis points. So, SREI Infra offering relatively lower rate of interest in a rising bond yield scenario has left me somewhat disappointed as an investor.

But, even the fixed deposit rates have been ruling at lower than satisfactory levels. In such a scenario, one should either wait for some other company to come out with its NCDs issue carrying relatively attractive rate of interest, or deploy money in short term deposits or short-term debt mutual funds. However, investors who do not want to wait for some other issue to invest their surplus money can consider investing in this issue.

Application Form – SREI Infra NCDs

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in SREI Infra NCDs, you can reach us at +91-9811797407

How to Revive Your Lapsed Life Insurance Policy?

Think of the things that went well for you this year. A rocking birthday celebration, amazing Diwali or Christmas filled with lights, New Year celebration full of fun or the last picnic with friends! The holidays you took with your family & friends were memorable too! So many things happened, and you cherished these memorable moments and events time and again. Amidst all the happy things, did you pay your term insurance premium in time?

If you wish to discontinue your term insurance policy for any reason, you can easily do so, but you are keeping your family’s future at stake while doing so. To maintain coverage, you must continue to pay the premium when due. If you do not do so, the policy will lapse, and your family won’t get the required coverage. Yes, there is no other additional cost, but it is a loss for your loved ones.

What is Term Insurance Lapse?

When you purchase a term insurance policy, you have to pay a certain amount of premium throughout the policy tenure to keep it active. In the insurance terminology, a lapsed policy is that insurance policy for which all the benefits are ceased. For some reasons, if you do not pay the due premium on time, your term plan will lapse. Such situation also arises when the policyholder fails to pay the premium even during the grace period.

How Can You Revive a Lapsed Term Life Insurance Policy?

If you have missed the premium payment, your policy will enter into a grace period zone. All term insurers give some grace period to their policyholders to enable them to pay their premiums. For term insurance policies, the grace period can be as follows:

Note, each company has its guidelines, and you should refer to your term insurance document to verify the grace period and other specific rules.

Your term life insurance policy will not lapse if the insurer receives your payment within the grace period. One important point to note is that your lifetime risk is still covered during the grace period. It means, the insurance company is always accountable for paying the sum assured if a valid claim is filed during the grace period.

Let us understand it with the help of an example. Suppose a person fails to pay the premium for a term insurance policy and unfortunately meets with an accident before the grace period ends and loses his life. Now, as the accident has happened within the grace period, the insurance company will have to pay the benefit as and when the family files the claim. However, if the accident occurs after the grace period, the insurer will not pay any benefit to the family.

What Happens After Grace Period?

If you go past the grace period without paying your premium, your term plan will lapse. It means, your beneficiaries will not get any benefit in case of any unfortunate event.

If you decide, you can still apply to revive the policy. If the insurer agrees to reinstate the policy, you will be required to pay the premium due from the end of the grace period. Again, each company has its guidelines for reinstatement.

When a term policy gets lapsed, it can be revived and brought to its full force by payment of the overdue premium (with interest) and a declaration about the current state of health or fresh medical examination. However, a lapsed policy can only be revived if the insurer agrees to do so. Following are the requirements for the reinstatement application:

Reinstatement Application Form: All companies will ask you to complete a reinstatement application form which is similar to the original application form you filled out at the time of buying the policy.
Health Statement: It is required to see if anything has changed with your health since your first application, therefore, you will have to submit a health statement.
New Medical Exam: Most companies won’t require this if you apply for reinstatement within a specified period. But again, it depends on the insurer.

Some Important Points to Note:

All insurance companies advise their customers to pay premiums on time as there is a multitude of premium payment options available. Here are some of the ways through which a policyholder can pay a premium:

Cheque/DD
Credit/Debit Card
Internet Banking
Wallets, like Paytm
Wire Transfer
Phone

A policyholder can issue a standing instruction to his/her bank so that premium gets deducted on a particular date. Further, a policyholder can also visit the insurer’s branch to pay the premium or place a request for a renewal cheque pickup with the insurer.

Customers can give the mandate to their banks to allow the premium deduction on a specified date
Insurers have tied up with banks so that their policyholders can pay premiums through their bank accounts. In fact, some banks are allowing people to pay their insurance premiums via ATMs

Don’t Let Your Term Insurance Policy Lapse

It is advised to continue paying the premium until the end of the term so that you can offer financial protection in the form of a sum assured to your family members in case of unexpected events. It is the most necessary backup plan for your life and the one thing that comes to your family’s rescue when life events turn sour.

Further, under Section 80C of the Income Tax Act 1961, any amount paid towards your insurance policy provides you tax deduction upto Rs 1,50,000 in a financial year. However, no tax benefit is available on a lapsed insurance policy.

Remember, term insurance is not for you, but for your family. It is your prime responsibility to take care of your loved ones which you would be able to do only if you pay your premiums on time.

Budget 2018 – LTCG Tax @ 10%, Grandfathering Clause & Dividend Distribution Tax (DDT) on Equity Mutual Funds

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]

Budget 2018 has reintroduced the long-term capital gain tax on equity shares and equity mutual funds. There were speculations about its comeback, but I never expected it to materialise, at least in this budget. Personally I believe cons of having it outweigh pros of having it, but it doesn’t matter at all. What really matters is how harsh this LTCG tax is and why there was no panic selling in the markets today. Let us try to find out.

Firstly, this is what the Finance Minister Arun Jaitley announced in his budget speech today – “I propose to tax such long term capital gains exceeding Rs. 1 lakh at the rate of 10% without allowing the benefit of any indexation. However, all gains up to 31st January, 2018 will be grandfathered. For example, if an equity share is purchased six months before 31st January, 2018 at Rs. 100 and the highest price quoted on 31st January, 2018 in respect of this share is Rs. 120, there will be no tax on the gain of Rs. 20 if this share is sold after one year from the date of purchase. However, any gain in excess of Rs. 20 earned after 31st January, 2018 will be taxed at 10% if this share is sold after 31st July, 2018. The gains from equity share held up to one year will remain short term capital gain and will continue to be taxed at the rate of 15%.

In view of grandfathering, this change in capital gain tax will bring marginal revenue gain of about Rs.20,000 crores in the first year. The revenues in subsequent years may be more.”

What seems a simple thing to read carries many ifs and buts behind it, and the most important here is the “Grandfathering Clause”. We’ll try to clear all these ifs and buts here, so let us take it one by one.

What is this ‘Grandfathering’ clause?

As per Wikipedia, “A grandfather clause is a provision in which an old rule continues to apply to some existing situations, while a new rule will apply to all future cases”.

In our case, whatever gains we have earned on our investments in equity shares or equity mutual funds (including balanced funds) till January 31, 2018 will be grandfathered, or will not be taxed at all. So, whether you sell your equity shares or equity mutual funds tomorrow, or between now and March 31, 2018, or even anytime after March 31, 2018, you will not have to pay any LTCG tax on your gains earned till January 31, 2018, if your holding period is more than 12 months.

So, please keep in mind, there is no need to panic in this situation, as there is nothing which is going to affect your gains till 31 January. There is only one thing that could affect your gains (future gains) adversely in this situation and that is your panic behaviour and nothing else. You should take your ‘sell’ decisions only if you think that other investors will panic and markets will move down sharply from here. Even in this case, your previous gains are not taxable and you would be able to protect your gains from probable future losses.

When will this 10% LTCG Tax come into effect?

It will come into effect from April 1, 2018 onwards. It is still a proposal and not applicable for the gains you book on or before March 31, 2018.

So, should we book our gains before it gets applicable with effect from April 1, 2018?

Absolutely NOT, there is no point doing it for this reason. Your long term capital gains earned till January 31 are 100% safe from this tax and it makes absolutely no difference to that portion of LTCG, whether you sell it tomorrow, or after April 1, or even after 2 years from today.

How would our long term capital gains be taxed if we sell them on or after April 1?

There will be 2 portions of your LTCG when your actually book your gains on or after April 1 – first, LTCG earned till January 31, 2018 and second, LTCG earned between February 1 and the date you sell your holding(s). First portion will be tax exempt, and second portion will be taxed at 10.4%, including 4% health and education cess.

What will be our cost of acquisition for the gains made after January 31, 2018?

There is a formula for determining your cost of acquisition for the shares or mutual funds bought on or before January 31, 2018, LTCG gains earned after January 31, 2018 and gains booked after holding them for more than 1 year. Here you have the formula:

The cost of acquisition will be HIGHER of:

a) Actual cost of acquisition, and

b) LOWER of:

(i) Fair Market Value of the shares/units as on January 31, 2018

(ii) Actual consideration received at the time of transfer

Let us take a look at the table below to understand it with four different scenarios:

How much LTCG is tax exempt?

LTCG upto Rs. 1 lakh per financial year is not liable to any tax, and you will have to pay 10% tax only on your long term gains over & above Rs. 1 lakh of exempt LTCG.

Like debt mutual funds, is there any indexation benefit available for calculating LTCG tax?

No, as the LTCG tax rate of 10% is considered to be on a lower side, indexation benefit to incorporate inflation effect has not been provided for in the budget.

Dividend Distribution Tax (DDT) @ 10% on Equity & Balanced Mutual Funds

Finance Minister Arun Jaitley has decided to tax your dividend income also which you get on your investments in equity mutual funds or balanced mutual funds. Here is what he announced in the budget:

“I also propose to introduce a tax on distributed income by equity oriented mutual fund at the rate of 10%. This will provide level playing field across growth oriented funds and dividend distributing funds.”

The onus of paying it to the government will not be on you. It will be the responsibility of the mutual fund which has announced to pay you this dividend, and it will be in the form of dividend distribution tax of 10%. This 10% will be deducted from the dividend announced and then dividend will be paid to you.

What’s your view on this reintroduction of LTCG tax and dividend distribution tax? Do you think it is going to have a substantial impact on our markets? Please share your views here. Also, if you have any query regarding any of the points mentioned in this post, please share it here.

Bharat 22 ETF Allotment Status & Listing

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]

ICICI Prudential has initiated the allotment process of Bharat 22 ETF and I think most of the investors must have received the allotment SMS or mail from ICICI Pru or their respective brokers or DPs by now. If you have not received any such intimation mail/SMS regarding the same, then you can check your allotment status from this link available on the website of ICICI Pru AMC – Bharat 22 Allotment Status.

Bharat 22 ETF offer period started on November 15 for the non-anchor investors and closed on November 17. It received an overwhelming response from the anchor investors, Qualified Institutional Buyers (QIBs) and Non-Institutional Investors (NIIs) and got subscription worth Rs. 31,750 crore approximately. Though retail category and retirement fund categories remained undersubscribed, but given their share of reservation, it was nowhere a bad response from either of them.

Units Allotted @ Rs. 35.97 Per Unit – Retail applicants, who submitted an application of Rs. 2 lakh worth of Bharat 22 units, have been allotted 5,560 units @ Rs. 35.97 per unit, which makes it Rs. 1,99,993.20 as against Rs. 2 lakh investment. So, it is 100% allotment this time around for a government backed ETF. Investors will get the balance investment amount credited directly to their respective bank accounts.

Discount of 3% – Allotment Price of Rs. 35.97 a unit has already incorporated the discount of 3% committed by the government. It makes its market value to be Rs. 37.08 a unit. However, as compared to Friday’s closing level of 3,748.85 for the S&P BSE Bharat 22 Index, the allotment price of Rs. 35.97 translates into a notional gain of 4.22% before listing.

PAN, DP ID – Client ID Required – You can check the allotment status of your investment in this ETF by entering your PAN number and DP ID – Client ID as you visit the allotment status link for this ETF.

Contact ICICI Pru AMC or CAMS for Allotment Issues or Queries – If you have not received any intimation, message or mail regarding its allotment and if it is not there in your demat account as well, you can either contact ICICI Prudential AMC on its toll-free no. 1800 000 6666 or 1800222 999 or its Registrar, Computer Age Management Services (CAMS) on 1800 200 2267 or 1800 419 2267.

Expected Listing on November 28 or 29 – Units of this ETF will be credited to our demat accounts on Monday and listing is expected within 2 working days post allotment.

If you have any more info about its allotment or any other query regarding Bharat 22 ETF, please share it here. I’ll try to respond to it as soon as possible.

ICICI Prudential Bharat 22 ETF NFO – November 2017 Issue

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

Bharat 22 ETF – Allotment Status

Finance Minister in his budget speech had set Rs. 72,500 as the disinvestment target for the current fiscal year 2017-18. In order to meet this steep target, the government has decided to sell its stake in 22 of its holdings, by forming an altogether new index called “S&P BSE Bharat 22 Index”. As its name suggests, this index has been designed by the Bombay Stock Exchange (BSE) in consultation with the government. Unlike Nifty CPSE Index, which has all its constituents to be the CPSEs, Bharat 22 Index has CPSEs, PSUs and 3 private companies (L&T, ITC and Axis Bank) as its constituents.

Here is the list of all its 22 constituents and their weightage in the index:

ICICI Prudential Bharat 22 ETF is an open-ended index scheme, to be listed on the stock exchanges in the form of an Exchange Traded Fund (ETF) tracking the S&P BSE Bharat 22 Index. This ETF has been launched by ICICI Prudential Asset Management Company and is named as Bharat 22 ETF.

Investment Objective – Bharat 22 ETF intends to generate returns that closely correspond to the total returns earned by the securities as represented by the Bharat 22 Index. However, the performance of the scheme may differ from that of Bharat 22 Index due to tracking error and also due to the scheme expenses.

NFO Opening & Closing Dates – This scheme will remain open for four days, only one day for the anchor investors i.e. November 14 and then three days for the non-anchor investors, including retail investors. For the non-anchor investors, it will open for subscription on November 15 and run for three days to close on November 17.

Reference Market Price/NAV – New Fund Offers, or popularly known as NFOs, normally get launched at Rs. 10 per unit as their NAV. This will not be the case with this scheme. During the NFO, each unit of this scheme will have a face value of Rs. 10 and will be issued at a premium, equal to the difference between the face value and the allotment price.

NAV of this scheme will be based on the Bharat 22 Index, and the allotment price would be approximately equal to 1/100th of Bharat 22 Index and calculated post adjusting the 3% discount offered by the government to Bharat 22 ETF for buying the underlying Bharat 22 Index shares.

3% Discount for All Investors – Investors making an investment during the offer period will be given a 3% discount on their investment. This 3% discount on the “Reference Market Price” of the underlying Bharat 22 Index shares will be offered to Bharat 22 ETF by the government of India.

Categories of Investors & Allocation Ratio

Anchor Investors – 25% of the total amount raised or 25% of Rs. 8,000 crore, whichever is higher, has been reserved for the anchor investors.

Retail Individual Investors (RIIs) – 25% of the total amount raised or 25% of Rs. 8,000 crore, whichever is higher, has been reserved for the retail individual investors also.

Qualified Institutional Buyers (QIBs) & Non-Institutional Investors (NIIs) – QIBs and NIIs too will have 25% of the issue reserved for each of their categories. In case of undersubscription in any or both of these categories of investors, unsubscribed portion will be allocated to the retail investors.

Target Amount to be Raised – The government has decided to raise Rs. 8,000 crore from this scheme. However, in case of oversubscription, the government would like to retain the whole of oversubscription in order to bridge its disinvestment target gap. So, it is highly likely that full allotment will be made to the retail individual investors.

Minimum/Maximum Investment Size – Retail individual investors can invest in the scheme with a minimum investment amount of Rs. 5,000. To remain a retail investor, the investment limit has been set at Rs. 2 lakhs.

Allotment & Listing – As per the offer document, investors will get the units allotted within 15 days from the closing date of the issue and listing on the stock exchanges will happen within 5 days from the date of allotment. However, like earlier CPSE ETF issues, I expect the allotment and listing to happen within 7-10 working days from the date the issue gets closed.

Demat Account Mandatory – As you cannot hold and trade ETFs in physical form, it is mandatory to have a demat account for you to invest in this scheme. Applications without relevant demat account details are liable to be rejected.

No Lock-In Period – As this ETF do not provide any tax benefit, there is no lock-in period for the non-anchor investors. Investors can sell their units whenever they want to do so.

Entry & Exit Load – There is no entry load to invest in this scheme and there is no exit load either as and when you decide to sell its units on the stock exchanges. You will be required to pay just your normal brokerage and other government taxes when you sell these units.

2.21% Dividend Yield – As per the BSE website, constituents of Bharat 22 Index are generating 2.21% dividend yield for its investors based on the dividends paid in the last one year. Though dividend yield is not a significant factor for me to invest in stocks or mutual funds/ETFs, I think this dividend yield of 2.21% is not too great for me to reconsider it for my portfolio.

20.28X PE Ratio – Price to earnings ratio (P/E Ratio) of Bharat 22 Index at present is ruling at around 20.28 times. If you consider Nifty to be trading at a P/E multiple of 26-27 times its trailing EPS, I think Bharat 22 Index is not too attractively valued considering most of its constituents are CPSEs or PSUs. You can only bank on their earnings recovery in order to expect a gradual rise in their share prices.

Should you invest in ICICI Prudential Bharat 22 ETF NFO?

Except 3% discount, there is nothing extraordinary in this ETF which attracts me to apply for it in this NFO. As most of its constituents are already trading close to their 52-week highs, you can consider this ETF to be trading close to its 52-week high. However, this should not be considered as anything negative for this ETF. If a stock is trading at or close to its all-time or 52-week highs, it doesn’t mean that it cannot go higher from those levels. Similarly, this ETF too has the potential to scale newer highs if its constituents continue rising as they have been in the last few months.

However, as most of these companies are CPSEs and PSUs, I think it is the government policies which are going to drive the share prices of these companies and thereby this ETF. Let us consider the decision taken by the government to recapitalise the public sector banks (PSBs) with Rs. 2.11 lakh crore worth of infusion over the next 2 years. Though it is a very positive measure announced by the government, but after all it is just an announcement and nothing concrete has taken place to actually strengthen these banks’ balance sheets and most importantly, this bank recap has done nothing to resolve the basic problems of PSBs – 1) extraordinary high levels of NPAs, and 2) poor level of accountability the managements of these public sector banks have shown over the past many years in which many of the private sector banks and NBFCs have flourished to higher levels over the opportunities lost by these PSBs.

Still, this announcement of bank recap has resulted in 36% returns in Nifty PSU Bank Index since Muhurat Trading on Diwali, from 2942.7 on October 19 to 4001.45 on November 10. What I want to say here is that if just an announcement of doing something good for the health of the public sector enterprises or overall economy can deliver such high returns in such a short period of time, then I think nobody has truly imagined the actual potential of these CPSEs and PSUs if the government honestly gets serious with its duty to run these companies professionally. If you trust the intentions and policy execution capabilities of the Modi government, then only this ETF is worth investing your money at these levels, or otherwise, go for the diversified equity mutual funds.

ICICI Prudential Bharat 22 ETF Application Form

HDFC Life IPO Review – Should You Invest or Not @ Rs. 275-290?

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]

HDFC Life Insurance IPO Details

Finalisation of Basis of Allotment – On or about November 14, 2017

Initiation of Refunds – On or about November 15, 2017

Credit of equity shares to investors’ demat accounts – On or about November 16, 2017

Commencement of Trading on the NSE/BSE – On or about November 17, 2017

Peer Comparison

Financials of HDFC Standard Life Insurance Company Limited

(Note: Figures are in Rs. Crore, except per share data & percentage figures)

As far as insurance business is concerned, HDFC has never been an aggressive player and probably that is why it is not the market leader. With HDFC Life, there are certain things which are positive and there are certain things in which it lags other players in the industry. It recorded highest growth in AUM among top five private players listed in the table above in the last 5-year period. Also, the company reported the highest claim settlement ratio among these players at 99.16%. However, as far as operating cost and persistency ratios are concerned, it lags both its listed peers, SBI Life and ICICI Prudential. The company has operating cost ratio of 12.6% as compared to SBI Life’s 8% and ICICI Pru’s 10.7%. But, Max Life has it at 15.7% and Bajaj Allianz even higher at 18%.

During FY 2016-17, HDFC Life reported total income of Rs. 30,554 crore as against Rs. 18,210.23 crore in FY 2015-16, profit after tax (PAT) of Rs. 886.92 crore vs. 816.79 crore and diluted EPS of Rs. 4.42 vs. Rs. 4.09. During the half year ended September 30, 2017, the company managed to generate total income of Rs. 14,415 crore, PAT of Rs. 554 crore and diluted EPS of Rs. 2.76. As on September 30, 2017, the company has a net worth of Rs. 4,464 crore and book value of Rs. 22.3 per share. At Rs. 290 a share, the company will be valued at a PE of 65.61 times based on its FY 2016-17 earnings, 52.54 times its annualised EPS of Rs. 5.52 for FY 2017-18 and 13 times its latest book value. To me, these are again stretched valuations by any standards.

As per the latest report issued by Milliman Advisors LLP, HDFC Life has an embedded value of Rs. 14,011 crore as on September 30, 2017. At Rs. 290 a share, the company will have a market capitalisation of Rs. 57,994 crore, and will be valued at 4.14 times its embedded value. As compared to HDFC Life, ICICI Pru and SBI Life are currently valued at 3.25 times and 3.63 times their embedded values respectively. So, as far as valuation based on embedded value is concerned, HDFC Life is seeking a premium over SBI Life and ICICI Pru.

These are not cheap valuations and therefore I think leave nothing great for the investors to make on the listing day. However, it is the HDFC brand which is going to support these high valuations and therefore I think it should list within a close price band of +/- 5%. This IPO is for the long term investors and therefore I think it should move in tandem with other HDFC group companies. Only investors with a long term view should apply and others should avoid this IPO.

HDFC Life IPO Details

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]

HDFC Life IPO Review – Should You Invest or Not @ Rs. 275-290?

After tepid listings of SBI Life and GIC Re, it is now the turn of HDFC Life to get itself listed on the stock exchanges with its initial public offer (IPO) of Rs. 8,695 crore. The issue is getting opened for subscription from tuesday, November 7 and will remain open for three days to close on November 9.

Like most of the IPOs in bull markets, this IPO too involves sale of stake by its existing promoters. HDFC is selling its 9.52% stake and Standard Life (Mauritius Holdings) is selling its 5.4% stake in this IPO. Post this issue, HDFC’s stake in the company will fall from 61.21% to 51.69% and Standard Life’s stake will fall from 34.75% to 29.35%.

The company has fixed its price band in the range of Rs. 275-290 a share and no discount has been offered to the retail investors. The offer would constitute 14.92% of HDFC Life’s post-offer paid-up equity share capital.

Here are some of the salient features of this issue:

Size & Objective of the Issue – HDFC and Standard Life (Mauritius Holdings) are collectively selling their 14.92% stake in HDFC Life in this IPO to raise Rs. 8,695 crore. HDFC Life will not get any proceeds from this offering.

Price Band & Retail Discount– HDFC Life has fixed its price band to be between Rs. 275-290 a share and the company has decided not to offer any discount to the retail investors.

Retail Allocation – 35% of the issue has been reserved for the retail individual investors (RIIs), 15% for the non-institutional investors (NIIs) and the remaining 50% shares will be allocated to the qualified institutional buyers (QIBs).

Reservation for HDFC Shareholders & HDFC Life Employees – HDFC Life has reserved 2.998 crore shares for the existing shareholders of its parent company HDFC, 21.45 lakh shares for the HDFC Life employees and 8.05 lakh shares for the employees of HDFC.

Bid Lot Size & Minimum Investment – Investors need to bid for a minimum of 50 shares and in multiples of 50 shares thereafter. So, a retail investor would be required to invest a minimum of Rs. 14,500 at the upper end of the price band and Rs. 13,750 at the lower end of the price band.

Maximum Investment – Individual investors investing up to Rs. 2 lakh are categorised as retail individual investors (RIIs). As a retail investor, you can apply for a maximum of 13 lots of 50 shares each @ Rs. 290 a share i.e. a maximum investment of Rs. 1,88,500. At Rs. 275 per share, you can apply for 14 lots only of 50 shares, thus making it Rs. 1,92,500.

Listing – The shares of the company will get listed on both the stock exchanges i.e. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) within 6 working days after the issue gets closed on November 9. Its shares are expected to get listed on November 17.

Here are some other important dates as the issue gets closed on November 9:

Finalisation of Basis of Allotment – On or about November 14, 2017

Initiation of Refunds – On or about November 15, 2017

Credit of equity shares to investors’ demat accounts – On or about November 16, 2017

Commencement of Trading on the NSE/BSE – On or about November 17, 2017

Peer Comparison

Financials of HDFC Standard Life Insurance Company Limited

The New India Assurance Company IPO Review

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

New India Assurance IPO Details

Should you invest in New India Assurance IPO or not @ Rs. 770-800?

During the financial year 2016-17, New India Assurance reported Gross Written Premium of Rs. 23,230 crore, up 20.82% against previous year’s Rs. 19,227 crore. However, Gross Written Premium is the only area in which the company registered some kind of growth, as the company failed to perform on all other parameters. The company reported an operating loss of Rs. 901.37 crore as against Rs. 533.43 crore loss it had in FY 2015-16. Its profit after tax (PAT) was also down 9.72% at Rs. 839.86 crore as against Rs. 930.35 crore in 2015-16.

Combined Ratio stood at 119.73% (vs. 117.97% in FY 2015-16) and Solvency Ratio was at 2.22 times (vs. 2.46 times in FY 2015-16). Combined Ratio of 100 or above indicates that the company is incurring losses in its core insurance business. As far as Return on Net Worth (RoNW) is concerned, it has fallen from a high of 12.32% in FY 2014-15 to almost half at 6.81%.

Recently listed ICICI Lombard is the only listed company with which we can compare NIA’s pricing and valuations, and NIA lags ICICI Lombard in almost all the parameters except Solvency Ratio. Firstly, NIA’s market share has declined from 15.6% in FY 2014-15 to 15% in FY 2016-17, whereas ICICI Lombard has been able to increase its pie from 7.9% in FY 2014-15 to 8.4% in FY 2016-17. HDFC Ergo and IFFCO Tokio too have gained on their respective market shares. Moreover, ICICI Lombard reported far better Combined Ratio (104%), Loss Ratio (80.4%) and Expense Ratio (23.6%) as compared to NIA for which these ratios stood at 118.7%, 91.3% and 27.4% respectively during the same period.

Peer Comparison

As far as its pricing is concerned, NIA is seeking a valuation of 74.63 times its trailing EPS of Rs. 10.72 and 4.88 times its book value of Rs. 164.04 as on June 30, 2017. The company showed a surprisingly remarkable turnaround in the first quarter of the current financial year and reported an EPS of Rs. 6.29 a share, based on which the PE ratio it is seeking has fallen to 31.8 times its annualised EPS of Rs. 25.16. However, looking at its declining or inconsistent performance in the past, I have a serious doubt over sustainability of this turnaround and that is why I don’t think the company deserves such high valuations. At these high valuations, I would personally avoid this IPO and invest my money with better managements and bankable businesses.