Muthoot NCD. Should you invest?



Muthoot finance, India’s largest Gold loan company has come up with the issue of “secured Non convertible debentures” for the second time. The issue opens on 22nd December 2011 and closes on January 7th 2012.

WHAT ARE NCDs?

NCDs are non convertible debentures- an instrument used for borrowing money from the public by corporates. It offers a fixed rate of interest to subscribers. Companies can issue debentures that can be converted into shares after a specified time. To specify that this one is not that kind, the tag ‘Non convertible’ is attached. It means these cannot be converted into shares of that company.

INVESTMENT OPTIONS

There are 4 options in terms of maturity. You can opt to invest for 2 years , 3 years , 5 years or 5 and a half years.Interest is payable annually.

In case you opt for 5 and half years NCD, the interest would be paid along with the principal at maturity only. The maturity value would be double the amount invested. So if you invest Rs 5000 for 66 months (5 1/2 years) you’ll get back Rs 10,000.

RATE OF INTEREST OFFERED

The interest rate offered is 13% for 2 years and 13.25% for remaining options, which is attractive as a debt instrument. Those who do not have debt investments in their kitty can consider investing in this NCD.The effective yield in the case of 5 and a half years NCD would be 13.43%.

MINIMUM INVESTMENT.

The ‘face value’ or per unit cost of NCD is Rs 1000. The minimum investment is Rs 5000.That means you have to purchase a minimum of 5 units.

HOW SECURED IS IT?

The term ‘secured’ means that the amount is secured with some assets of the company so that, in case of default, the company would sell those assets and repay the debenture holders.

Here, it’s worth to note that there is no guarantee that assets would fetch the required amount. Whatever is realized would be distributed to the debenture holders.

The issue has been given ‘AA’ rating by CRISIL and ICRA. The ‘AA’ rating means the credit rating agencies have given a ‘stable’ rating for these NCDs. That’s a good credit rating score.

However, AA rating is a private independent rating and it does not mean that you are secured in all aspects. It is not a financial guarantee of any sort.

Bank FDs are definitly more secured than NCDs.

HOW ARE THEY ISSUED?

These bonds are issued in demat form and listed on the BSE.

WHAT HAPPENS AFTER THE ISSUE CLOSES?

They will be listed on the BSE after the issue closes. You can always exit from your investment by selling it anytime in the secondary markets.

THE RELATION BETWEEN INTEREST RATES AND BONDS.

The interest rates and price of bonds are inversely related. As the interest rates move up, the price of the bonds come down. Since the interest rates are at peak now, investors may benefit in the form of capital appreciation when the interest rate drops.

TDS and TAXATION.

Generally no tax will be deducted at the time of payment. However, interest income from bonds is taxable in the hands of the recipient. It is taxed under the head ‘income from other sources’. So, normal slab rates apply. The rate at which you  have to pay tax would depend on the tax bracket in which you fall.

OUR SUGGESTION

You can consider a small investment in this issue. High exposures to Non-convertible debentures are not recommended.

In the present market scenario, a 2 or 3 year investment is recommended. 2 years should be comfortable in my opinion.

UPDATES- 17/4/2012

Since lot of readers have doubts about liquidation of NCds I am updating this post with some more details:

Liquidating NCDs:

1. If Bonds are listed; you can sell it in the secondary market before its maturity.

2. In this case, Muthoot NCDs are listed. So you can sell it off before maturity – provided there are buyers for it. Bonds may not have the liquidity of shares. There is no active market for NCDs on stock exchanges and their liquidity is low.

3. If NCDs are sold with in a period of 12 months from the date of allotment, short term capital gains / loss (STCG) will arise and if you decide to sell NCDs after a period of 12 months, the resulting gain or loss is called long term capital gains / loss (LTCG).

4. Interest is paid on an annual basis and it will not attract TDS if NCDs are listed on stock exchanges and held in demat form. However, when you file your income tax returns, you will have to add the interest under the head ‘income from other sources’ and pay tax on it according to your income tax slab.

5. If NCDs are sold before maturity –

a)      If the sale price is above the face value. In this case it attracts capital gains. Depending upon how long you’ve held the NCD, it will be treated as long term capital gain or short term capital gain. (Read point 3 above). If the reverse happens, the resulting loss will be treated as short term / log term capital loss.

b) The interest portion. – When you sell before maturity- for example if you’ve sold your NCDs after holding it for 7 months, you don’t get the proportionate interest. Interest will be paid annually/ half yearly/ quarterly ( according to the scheme) to all the Debenture Holders whose names appear on the Register of Debenture Holders of the Company as on the Record Date, fixed by the Company.In respect of the NCDs held in electronic form, interest will be paid to the debenture holders whose names appear as the benefial owners as on the Record Date fixed by the Company, as per the details furnished by National Securities Depository Limited and Central Depository Services (India) Limited, for this purpose.

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19 Responses to “Muthoot NCD. Should you invest?”

Mansoor

December 22, 2011 at 12:43 pm

Wow, I can confidently say that I understand what are NCDs. I have read these a lot of times but never understood all the aspects of it. You bring the financial terms to the simplest and understandable use. Thanks Victor.

Amit Surpuriya

December 23, 2011 at 12:45 pm

FOR APPLICATION FORMS CONTACT : AMIT SURPURIYA – 9850873688 – KSHITIJ FINANCIAL SERVICES – PUNE

Rupak

December 26, 2011 at 2:44 pm

Can one sale these NCDs in open market latter at some point of time?

J Victor

December 28, 2011 at 7:24 am

yes .. you can sell NCDs at a later point in the open market.

Commodity Tips

December 29, 2011 at 10:22 am

Good info and explanation as usual. Thanks for sharing the info.

InsureInvest

January 5, 2012 at 6:29 pm

What is the tax treatment of NCDs if you sell them in open market?

J Victor

January 5, 2012 at 6:52 pm

Interest income from NCDs and tax treatment is similar to interest income such as interest income from FDs. So for interest part- Normal tax rates as applicable.

If you decide to sell the NCDs on the stock exchange, capital gains can also arise.

If NCDs are sold with in a period of 12 months from the date of allotment, you have to pay tax on the capital appreciated. It’s called short term capital gains.

If you decide to sell NCDs after a period of 12 months, the resulting gain or loss is called long term capital gains / loss (LTCG).

Short term gains are taxed at normal rates.

Long term gains are taxed at 10% without indexation or at 20% with indexation.

Khushboo

February 14, 2012 at 11:36 am

I invested in this NCD.. can anyone tell me when will this NCD get listed??

rushabh

March 26, 2012 at 9:26 pm

Hi

I am an NRI Investor who is interested in investing in this NCD. What do i need to have as a investor to apply for this?? Please advise.

J Victor

March 28, 2012 at 4:21 pm

You’re a bit late. The offer is closed.

kcs.varma

April 3, 2012 at 1:25 pm

if i bought this NCD with 10000rs(10units) with 2year period. if i want to exit before 6 months,then what is the amount i wil get back.

Paul

April 12, 2012 at 1:39 am

You have noted very interesting points! decent site.

RAJAT

April 15, 2012 at 2:20 am

i want to know if this issue is an ex. interest or a cumulative one??
secondly if i purchase the debentures from the secondary market , will i get the interest for the full year or for the balance of months?? of if i sell the securities will i get the interest for the time period i kept the security??
for example:
i purchased 10 qty @ 12%pa for 1000 each . but i sold the issue after 6 months. will i get the interest upto 6 months?? or the sold price is final consideration??
PLEASE HELP.

J Victor

April 17, 2012 at 9:15 pm

Hi rajat,

Here’s the full details regarding liquidation of NCDs.

Liquidating NCDs:

1. If NCds are listed; you can sell it in the secondary market before its maturity.

2. In this case, Muthoot NCDs are listed. So you can sell it off before maturity – provided there are buyers for it. NCDs and Bonds may not have the liquidity of shares. There is no active market for NCDs on stock exchanges and their liquidity is low.

3. If NCDs are sold with in a period of 12 months from the date of allotment, short term capital gains / loss will arise and if you decide to sell NCDs after a period of 12 months, the resulting gain or loss is called long term capital gains / loss.

4. Interest is paid on annual / half year / quarterly basis ( according to scheme) and it will not attract TDS if NCDs are listed on stock exchanges and held in demat form. However, when you file your income tax returns, you will have to add the interest under the head ‘income from other sources’ and pay tax on it according to your income tax slab.

5. If NCDs are sold before maturity –

a) If the sale price is above the face value- it attracts capital gains. Depending upon how long you’ve held the NCD, it will be treated as long term capital gain or short term capital gain. (Read point 3 above). If the reverse happens, the resulting loss will be treated as short term / log term capital loss.

b) The interest portion. – When you sell before maturity- for example if you’ve sold your NCDs after holding it for 7 months, you don’t get the proportionate interest. Interest will be paid annually/ half yearly/ quarterly ( according to the scheme) to all the Debenture Holders whose names appear on the Register of Debenture Holders of the Company as on the Record Date, fixed by the Company.In respect of the NCDs held in electronic form, interest will be paid to the debenture holders whose names appear as the benefial owners as on the Record Date fixed by the Company, as per the details furnished by National Securities Depository Limited and Central Depository Services (India) Limited, for this purpose.

Komal

June 3, 2012 at 6:38 pm

I would like to invest in India. I am overseas now. Do I need KYC. Is there a way to get it done directly without visiting India?

J Victor

June 3, 2012 at 7:37 pm

Yes, you can directly get going from there. KYC is required. you also require a PAN card.

Arun

September 7, 2012 at 11:54 am

Hello Victor,

I am trying to understand what NCD means.
I see that there are two rates: coupon rate and YTM rate.
According to this: http://www.edelweiss.in/Debt/default.aspx – MFLNCD1 has a YTM of 18%. Coupon Rate of 12%.
It will mature in October 2012.
If I buy 10 units of that particular NCD now, how much money will I get when it matures?

Thanks
Arun

J Victor

September 9, 2012 at 11:21 am

Hi arun ,

The coupon rate is the actual interest rate on a bond.

YTM rate means Yield to maturity. YTM is basically an estimate – the return you would be able to generate if you hold it till maturity and at the same time reinvest all of your interest payments at a fixed interest rate.

Mukesh

April 19, 2013 at 11:38 am

I have got a doubt in mind can anybody will clarify it. NCDs are held by me in electronic form in Demat account. When NCDs are matured, the proceeds is automatically credited to my Bank account linked with the said Demat account or I have to complete some other formality also ???

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