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Is it worthwhile investing in India Infoline Finance Ltd's unsecured NCD?

Posted by PersonalFN
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Company Overview

India Infoline Finance Limited (IIFL) incorporated on July 07, 2004 was formerly known as India Infoline Investment Services Private Limited before going public. India Infoline is a leading company operating in the financial services space. It derives its income primarily from equity broking, third party products distribution and financing and investment activities. Based on the revised regulatory framework prescribed by RBI for NBFCs, IIFL was categorised as ‘Loan Company-Non Deposit Accepting' and is a systemically important non-deposit taking NBFC.

The aforesaid company focuses on mortgage loans, capital market finance, gold loan and healthcare finance.

Product wise Portfolio
(Source: Offer Document, PersonalFN Research)


Its loan portfolio as on March 31, 2012 revealed that the mortgage loans formed 44.7% of the total loan book, while the second and third position was occupied by gold loan and capital market financing which comprised 41.1% and 11.1% respectively.

In FY 2010-11, company included one more product to its product portfolio - healthcare financing. Healthcare financing includes medical equipment and project funding in the healthcare sector.

At present in order to augment the lending and working capital needs of the company, India Infoline Finance Ltd (IIFL) is currently offering unsecured Non-Convertible Redeemable Debentures (NCD) of face value of Rs 1,000 each at par aggregating to Rs 250 crore along with a green shoe option to retain oversubscription up to Rs 250 crore, thereby taking the total issue size upto Rs 500 crore.

The details of the offering (NCD) are as follows:
Issuer India Infoline Finance Limited
Offering Public Issue of NCDs aggregating to Rs 250 crore with an option to retain over-subscription up to Rs 250 crore for issuance of additional NCDs aggregating to a total of upto Rs 500 crore.
Rating ‘CRISIL AA-' by CRISIL & ‘ ICRA AA-' by ICRA
Security Unsecured Subordinated Debt
Face Value Rs 1,000 per bond
Issue Price At par (Rs 1,000 per bond)
Minimum Subscription 5 NCDs and in multiples of 1 Bond thereafter
Tenure
  • Option I: 72 months
  • Option II: 72 months
  • Option III: 72 months
Coupon rate
  • Option I: 12.75% (Monthly Interest)
  • Option II: 12.75% p.a. (Annual Interest)
  • Option III:12.75% (Cumulative Option)
Reserved Individual (RI) Individuals applying for NCDs aggregating to a value not more than Rs 5 lacs
Unreserved Individual (UI) Individuals applying for NCDs aggregating to a value more than Rs 5 lacs
Trustee IDBI Trusteeship Services Limited
Listing NSE & BSE
Depository National Securities Depository Limited and Central Depository Services Limited
Registrars Link Intime India Private Limited
Issuance In physical and dematerialised form
Issue Open Date September 05, 2011
Issue Close Date September 18, 2011
Deemed Date of Allotment The date on which the Board of Directors/or duly authorised Committee of Directors approves the Allotment of the NCDs. All benefits relating to the NCDs including interest on NCDs shall be available to the Debenture Holders from the Deemed Date of Allotment. The actual allotment of NCDs may take place on a date other than the Deemed Date of Allotment.
Eligible Investors  
Category I
  • Public financial institutions, statutory corporations, scheduled commercial banks, co-operative banks and regional rural banks, which are authorised to invest in the NCDs;
  • Indian Provident funds, pension funds, superannuation funds and gratuity funds, authorized to invest in the NCDs;
  • Indian Provident funds, pension funds, superannuation funds and gratuity fund, which are authorised to invest in the NCDs;
  • Venture capital funds registered with SEBI;
  • Insurance companies registered with the IRDA;
  • National Investment Fund;
  • Mutual Funds registered with SEBI
Category II
  • Companies; bodies corporate and societies registered under the applicable laws in India and authorised to invest in the NCDs;
  • Resident Indian scientific and/or industrial research organizations, authorized to invest in the NCDs;
  • Public/private charitable/religious trusts which are authorised to invest in the NCDs;
  • Scientific and/or industrial research organisations, which are authorised to invest in the NCDs;
  • Partnership firms in the name of the partners; and
  • Limited liability partnerships formed and registered under the provisions of the Limited Liability Partnership Act, 2008.
Category III (RI and UI)
  • Resident Indian individuals; and
  • Hindu undivided families through the Karta
Note: PAN card is mandatory for subscribing to these NCDs. A self attested copy shall be enclosed along with the application form.

As seen above, investors' will have three options for subscription, earning a respective yield as presented below:


Series I II Option III
Minimum Application amount (Rs) 5,000 5,000 5,000
Thereafter in Multiples of (Rs) 1,000 1,000 1,000
Tenor 72 months 72 months 72 months
Interest Payment Monthly Monthly N.A. (since Cumulative)
Coupon 12.75% per annum 12.75% per annum N.A.
Tax slabs (%) 10.30 20.60 30.90 10.30 20.60 30.90 10.30 20.60 30.90
Effective Yield –Pre Tax (%) * 13.51 13.51 13.51 12.75 12.75 12.75 12.75 12.75 12.75
Post Tax Returns (%) * 12.05 10.60 9.17 11.43 10.12 8.81 11.73 10.66 9.55
(Source: Draft prospectus registered with SEBI. & PersonalFN Research)

Well, after reading the details of the NCD (as provided above), there may be still some more questions popping up, which are answered hereunder:

  • Will I get any tax benefit if I invest in these bonds?

    No, these bonds do not entitle you to any tax benefit nor are these any "infrastructure bonds", which make you eligible for an additional tax deduction under section 80 CCF.

  • What is the Tax Treatment of interest on these NCDs?

    The interest earned on the NCD is chargeable to tax, under "income from other sources", and will be brought to tax at the marginal rate of taxation. To simply put, it will be taxed as per the tax bracket applicable to your total income for the relevant assessment year. It is noteworthy that no tax will be deducted at source if these bonds are subscribed to in the demat form.

  • Can a minor apply to these bonds?

    Yes, a minor can apply for these bonds, but only and only through a guardian.

  • Can one apply in joint names?

    Yes, one may apply in a joint name. However, the demat accounts will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account. Moreover, all payments will be made out in favour of the first applicant as well as all communications will be addressed to the first named applicant whose name appears in the application form and at the address mentioned therein.

  • Who will get the interest in case of joint application?

    In case of joint application, interest will be accounted to the first holder only.

  • My demat account is in joint name, but I want to apply is a single name?

    In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.

  • If I'm an NRI can I invest in these bonds?

    No, NRIs are not eligible to invest in these bonds.

  • Is there a lock-in period while investing?

    No. There is no lock-in period for these bonds.

  • In whose favour the cheque is to be made?

    Cheques/Drafts have to be made in the favour of "India Infoline Finance Limited- NCD Escrow" and crossed "A/C PAYEE ONLY".

Our View:

The evaluation of the company's financial health reveals that the capital adequacy ratio is reasonable at 17.86% (as against the minimum 15% prescribed by RBI), for tier I capital; which the company expects to enhance to 23% through this issue. The Net Non-Performing Assets (NPAs) of the company also constitute a mere 0.40% of the total loan book as on March 31st 2012. However, we think the company is relatively a new player (in the NBFC business) and is yet to prove its mettle, although in the past three years it has grown at a brisk pace. The loan book of IIFL jumped from Rs 956 crore in 2009 to Rs 6,746 crore in 2012, thereby reflect a growth of 91.8% CAGR. However this growth is mainly attributed to the growth in mortgage backed loans. Majority of disbursals have happened in 2011. While it appears that company has put risk management systems in place, any asset liability mismatch or a sudden spurt in NPA would be a big risk as it may weaken the financial position of the company. Moreover, this we think is relevant to take into account in the backdrop of a slowdown in the economy.

As far as the NCD offer is concerned, we think that minimum ticket size has been kept low at Rs 5000 to encourage the retail participation. Although stable ratings have been conferred for the issue (‘CRISIL AA'- by CRISIL and ‘ICRA AA'-Stable by ICRA) and yields are attractive, we think that the unsecured nature of the NCD (subordinated) from IIFL makes it a risky investment proposition. Hence, given that we recommend investors to stay away from the said NCD. However, if you risk appetite enables you to invest in such an unsecured NCD you may consider investing in the same to earn an attractive yield. Investors with cconservative and moderate risk profile may skip this NCD issue and wait for better rated "secured" NCDs from well established companies which may carry lower risk.

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Quiz: How well do you know India's economy?

Question 1

Which of these products is India the world's largest producer of?

Poll Choice Options
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  • Milk
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