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Muthoot Finance Limited NCD

In this article we intend to provide comprehensive knowledge regarding the Muthoot Finance NCD issue, for the investor who would like to invest in products that provide a certain level of security. This article not only provides information about the forthcoming NCD but also informs the investors about smarter ways of investing in Non Convertible Debentures.

Before we get into the details of the NCD issue at hand, we would like to inform the readers and potential investors about what a NCD is, how it is to be applied for and what are the few nuances of this product which all investors must know about.

Important points while applying for a NCD which investors may not know about:

1. 1. Though the NCD can be applied for through a cheque or through The ASBA route (Application supported by Blocked Amount), we advise all applicants to apply for the NCD via a cheque.
    There is a specific reason for this. The issuer (in this case Muthoot Finance Limited) will pay the applicant interest on the amount that is transferred through the check for the time period before the final allotment (to compensate for the interest that is foregone by the applicant). This facility is not available for the ASBA applicants. In case the allotment is successful to the fullest then the applicant will receive 5% p.a. interest for the number of days between the debit of the amount from the applicant’s Bank account and the final allotment. If the allotment is not successful then in that case the applicant will receive 8% p.a. on the amount that was debited from the applicant’s Bank account for the time period before the allotment and after the debit. In case of partial allotment the sum that has been invested will receive 5% p.a. (for the time period mentioned before) and the balance that has not been invested will get credited to the applicant’s Bank Account along with the interest at 8% p.a. (for the time period mentioned).
  2. It is always better to apply for the NCD through the DEMAT route (not physical). This is so because applicant will find it easier to sell the NCD in the secondary markets in case of need of funds. The NCD will be held in the applicant’s DEMAT account and this results in less confusion and a smoother process for all future transactions. Many problems arise when the NCDs are held in Physical Form. The applicant may misplace the important documents, moreover while liquidating the investments the process is long and tiresome.
  3. Some individuals also look for capital appreciation in the face value of the NCD. We would like to clear the air in this regard. Yes, it is definitely possible that the investors will get an appreciated price for their NCDs when they want to sell the same in the secondary markets. This is true but only for certain type of investors. Capital Appreciation on Fixed income instruments such as a NCD depends on the demand for that particular instrument. The demand in turn is dependent on 3 factors. First is the time remaining to maturity, second is the interest that is accruing on the particular instrument and third is the interest rate prevailing in the market.
    Let us explain the first point a little deeper. For instance you are a holder of a 38 month NCD earning 8.5% per annum and want to liquidate the same after 1.5 years (1 year six months), then in that case there is a good possibility of fetching a premium in the secondary market but another person holding a 60 month NCD will definitely earn a higher premium. This is because there will be greater demand for the 60 month NCD as it still has 3.5 yrs to maturity as compared to the 38 months NCD which only has 1 year 8 months to maturity. We are assuming the interest rate prevailing in the market (on government securities) is hovering around 6.5 % p.a. mark.
    The second factor mentioned above was that of the interest accrued on the instrument. We will explain 3 scenarios for a single instrument to explain this factor. Let’s take the example of 3 investors. Each holds a 38 month NCD, but the difference lies in the frequency of the interest pay out. Investor A has chosen a monthly pay-out from the NCD, Investor B has chosen the annual pay-out of interest and Investor C has chosen the cumulative interest option. If all three want to liquidate their investments after 1 year 6 months, then the maximum premium will be fetched by investor C since he hasn’t withdrawn any interest and this will increase the demand for his instrument. Investor B will get the second highest premium since he has withdrawn only 1 year’s interest. Lastly the investor A will fetch a premium but lesser than the other two since he/she has withdrawn 18 months of interests. Again, this is assuming that we are in a depreciating interest rate cycle or the interest prevailing in the market is far below the NCD’s interest.
  4. The last point to take notice here is that applicants must aim to apply to the NCD in the first few days itself. The allotment in a NCD is different from that of an IPO. Here it’s on the basis of the first come first serve basis. This means the issue will come to an end once the Shelf Limit of the IPO is reached (in this case INR 2000 crore).

MUTHOOT FINANCE NCD DETAILS:

Muthoot Finance will launch its NCD on the 11^th of April and the issue will close by the 10^th of next month. This NCD issue has a Tranche issue base of INR 200 Crore and a Shelf Limit of INR 2000 Crore. What this means is that though the base subscription that Muthoot is targeting from the NCD offer is INR 200 crore but it will accept applications up to a maximum of INR 2000 crore after which the issue will close (even if the 2000 crore is reached any time before May 10^th 2017).

The issue has the following structure:

Process to Apply for the Muthoot Finance NCD

The important point to note for the investors here is that the documents required while investing depend on whether or not the applicant has a DEMAT account.

If the applicant’s have a DEMAT account then all they need to do is:

Submit a cheque for the investment amount, drawn in favor of “Escrow Account Muthoot Finance NCD Public Issue”
Submit the application form (download the form from the end of the article).

For those who don’t have a DEMAT account, it is advisable that you apply to open a DEMAT Account. We advise you to do this as soon as possible since all future transactions for the NCDs become far easier through the DEMAT mode (as explained before in the article).

For investors who would like to invest in the physical form need to have the following documents:

PAN Card
Address Proof
Passport sized Photograph
Blank Cheque of the Bank in which they would like to receive the payment (only in case the investor wants to receive the interest in another account other than the one from which he is making the payment) – This facility is only available to the investors who are applying through the physical mode.
Cheque of Investment drawn in favor of: Escrow Account Muthoot Finance NCD Public Issue

Important details of the Muthoot Finance NCD:

1. As you can see from the table given above (ISSUE STRUCTURE), the Retail Individual Category applying for the NCD issue, has INR 600 crore that is segregated out for them. This translates to 30% of the Shelf Limit. The same segregation is for the HNI clients as well. Eligible investors in both the categories i.e. Retail Individual as well as HNI (Individual) are the following:
  - Resident Indian individuals and
  - Hindu Undivided Families through the Karta
2. The issue consists of Secured as well as Unsecured Debt. The secured NCDs amount to INR 1950 crore, whereas, the unsecured NCDs amount to INR 50 crores. The difference between the secured and unsecured debt is critical to be understood by the investors. Secured NCDs, are backed by the assets of the Issuing company i.e. in this case Muthoot Finance Ltd. What this means is that in case, in the distant future, the issuer declares himself as insolvent, then assets that he has used to secure the money raised through the secured NCDs will be used by to pay back all the investors. The secured investors will get precedence over the unsecured investors in case of insolvency/bankruptcy of the issuer.
3. This issue provides multiple options for the investors to receive interest from their investments. The investors have an option to receive the interests Monthly, Annually or on a cumulative basis right at maturity. Under each scenario there are different NCD maturities that the investor can opt to invest in.
4. The Muthoot Finance Limited NCD Issue has received a rating of AA- from CRISIL as well as ICRA (Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations).
5. The Net Proceeds raised through this Issue will be utilized for following activities in the ratio provided as below :
  - For the purpose of lending- 75% of the amount raised and allotted in the Issue
  - For General Corporate Purposes- 25% of the amount raised and allotted in the Issue