10.4% Manappuram Finance NCD Oct 2018 – Is it worth to invest?

10.4% Manappuram Finance NCD Oct 2018 will be open for subscription from 24th October 2018 to 22nd November 2018. These are secured NCDs. Hence, is it worth considering the interest rate it offers and the security?

During such low-interest rate regime, if someone offering you 10.4% interest on your investment then it is definitely EYE catching right? However, why they are offering such a high-interest rate? what are the risks involved here?

After the debacle of IL&FS crisis, many of us have to look twice before simply investing on CURRENT ratings and the eye-catching interest rates.

About Manappuram Finance Ltd Company

Manappuram Finance Ltd is an NBFC who are the leaders in gold finance business in India. Over the last two years, the company has diversified into new business areas like microfinance, vehicle and housing finance, and SME lending. In February 2015, the company acquired Asirvad Microfinance Pvt. Ltd. with AUM a little short of Rs.3,000 million. Today, three years of its takeover, AUM has more than Rs.24,000 million after the subsidiary expanded operations to new geographies like Madhya Pradesh, Chhattisgarh, Punjab, Haryana, Chandigarh, and UP. Accelerated growth is reported in the other new business segments too.

As of June 30, 2018, they disbursed Gold Loans to customers from a network of 3,331 branches of the company in 28 states and union territories of India, including 2,236 branches in the southern states of Andhra Pradesh, Telangana, Karnataka, Kerala and Tamil Nadu.

What are debentures?

Before jumping into understanding this 10.4% Manappuram Finance NCD Oct 2018, let us first understand more about NCDs. I have already written a detailed post on this aspect (NCD (Non Convertible Debentures) – Who can invest?). I will copy paste the same post here for your better understanding.

Debentures are nothing but you are lending the money to the company. In return, the company is promising you the interest rate and return of principal at the specified time period. Then what is the difference between debentures and bonds?

In case of India, the difference between bonds and debentures are same. However, there are slight differences only the reasons for which companies borrow money from us (investors). Usually, bonds are meant for long-term company’s borrowing. However, debentures are meant for meeting short-term company’s requirement.

Types of Debentures

Let us now understand the different variants of debentures.

Convertible and Non-Convertible Debentures

Convertible debentures mean after the specified time, these debentures are converted into shares (stocks) of the company. Up to that conversation, you will enjoy the fixed specified coupon (interest rate) on such debentures. After that, your earnings depends on price appreciation of the stock or the dividend income you receive (if the company declares it).

Non-Convertible Debentures, on the other hands, will never be converted into shares (stocks) of the company. Investors who invest in such non-convertible debentures will enjoy fixed interest rate up to maturity and after that return of principal (exactly like Bank FDs).

Secured and Unsecured Debentures

Now within debentures, there is one category like secured and unsecured debentures. Secured debentures mean companies while borrowing money from you usually along with a promise to repay the interest and principal timely, put up some asset (such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders) as surety for the loan.

Secured means in case of the company goes bankrupt or goes something wrong, the company will sell such asset and repay you the money. Hence, secured debentures are usually safer than unsecured.

In case unsecured debentures, if the company goes bankrupt, then you will get the money when all such secured debtors amount is paid back. Hence, unsecured debentures are risky than secured and also because of such risk they offer a higher interest rate to you than the secured.

Call and Put Option in Debentures

There are one more variants in case of debentures and they are usually called as Call or Put Option Debentures.

A CALL option means the company has an option to ask the investor to surrender the debenture after a certain period to them. In such a situation, the company will pay back the principal to you.

Usually, companies exercise this option if interest rates go down, and the company can get funds at lower rates from the market. In such a situation, instead of paying you a higher interest rate, companies can exercise this call option and go for a cheaper loan.

On the other hand, a PUT option means that the investor has an option to surrender the debenture if he wants to, and get back his principal.

Suppose if interest rates go up and what you are receiving from your debenture is offering you lesser interest, then you can exercise this option and get back your money to invest somewhere else. A put option gives a lot of flexibility to the investor – if interest rates go up, and he can get better rates from the market.

Do remember that such CALL and PUT options are available to investors after holding the debentures for certain periods. Also, companies give you a time period to accept or exercise such options and within that period you have to exercise it.

Taxation of NCD (Non-Convertible Debentures)

# Interest Income

The taxability of interest on NCD will depend on the method of accounting you follow for recognizing your income.

If you are following the cash method of accounting, interest will be taxable as and when the interest is received.

However, under the mercantile method of accounting, interest income on NCD will be taxable as and when interest is accrued and due.

Hence, interest income is treated as “Income from Other Sources” and treated accordingly.

# Short Term Capital Gain

If you held the debentures for less than a year and sold it in the secondary market, then any such gain from this selling will be taxed according to your tax slab.

# Long Term Capital Gain

If you hold the listed NCD, (cumulative or annual interest payment), for a period of one year or more, and on selling such NCD if you earn the gain, then such gain will be long-term capital gains (LTCG) chargeable to tax at 10% without indexation benefit.

NCD (Non-Convertible Debentures) – Who can invest?

Many of us blindly invest with the lure of high returns from such debentures. As I told you earlier, currently few NCDs are offering you high-interest rate than banks.

Advantages of NCD (Non-Convertible Debentures)

• These are good if you are looking for a constant stream of income. Do remember that few NCDs offer you to return interest and principal at maturity itself. Hence, in such a situation, they act like typical FDs for you.
• Usually offers higher interest rates than the Bank FDs.
• These NCDs are listed in stock exchanges. Hence, in the case of liquidity, you can sell it in the secondary market.
• Interest will be directly credited to your bank account. Hence, the ease of managing money.
• There will not be TDS (Tax Deducted at Source) for these NCDs if you held them in Demat format. Hence, in this feature, they have an edge over Bank FDs.
• It will give you diversification to your debt portfolio.

Disadvantages of NCD (Non-Convertible Debentures)

• Credit Rating-Never trust the current credit rating and jump into investing. Credit rating may change at any point of time based on the company’s financials. Hence, beware of credit rating.
• Liquidity-Even though such NCDs are listed in the secondary market (like BSE or NSE), they are very thinly traded. Hence, you may face the liquidity issue.
• Post Tax Returns-Always check for post-tax returns on the interest you will receive. The formula to calculate the same is given below. Hence, a 9% NCD may not be the same for 10%, 20% or 30% tax slab individuals.

Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }

• Why a company needs the money-Check why they need the money? Why they are offering you higher interest rates than Bank FDs. If it is not possible to gauge the same by you, then knock the experts’ door and then only invest.
• HIGH RETURNS MEANS HIGH RISK-As I said above, if they are offering you the highest interest rate than Bank FDs, then there is always a risk involved. Mere SECURED DEBENTURES means not fully secure that you will get the money the next day after the company goes bankrupt.
• Check Financial Statement-Check financial statement of the company for the like how much % of their total asset the company allocating for unsecured loans, Capital Adequacy Ratio (CAR), how much % of their total asset is set aside for the NPAs (non-performing assets) and like interest coverage ratio.

10.4% Manappuram Finance NCD Oct 2018 Features

# Issue Opening Date

24-Oct-2018

# Issue Closing Date

22-Nov-2018

# Mode of Issue

Compulsorily in dematerialized form.

# Face Value

Rs 1,000.

# Tenure Options

400 days, 2 Yrs, 3 Yrs, 5 Yrs and 7 Yrs

# Interest Rate

Interest rates are between 9.6% to 10.4%.

# Secured or Unsecured?

These are secured NCDs.

# Minimum Investment

The minimum investment is for the 10 bonds. It means you have to invest a minimum of Rs.10,000. However, there is no upper limit. But the investment should be in multiples of 1 Bond.

# Listing

These NCD bonds would be listed on BSE.

# Eligibility for NRIs

NRI’s cannot apply to this NCD subscription.

# Credit Rating

These NCD’s are rated as CARE AA/Stable by CARE Ratings and BWR AA+ Stable by BWR Ratings.

# Issue Size

The issue size Rs 1,000 Crores.

# Nomination

Yes, one can nominate for such holding and can be changed at any point of time before maturity.

Below is the interest chart of 10.4% Manappuram Finance NCD Oct 2018.

10.4% Manappuram Finance NCD Oct 2018 – Is it worth to invest?

I have already covered the full part of who can consider such NCDs. However, considering the recent frequent change in Credit Ratings of the companies by these credit companies, it is hard to believe and invest blindly. Hence, I thought to add few more points here.

# NCDs are not like Bank FDs

Do remember one thing that NCDs are not like typical Bank FDs, where you invest now and regularly receive the monthly or yearly interest payment and at the end, you get the principal.

The risk is more in case of NCDs even though they claim to be secured.  Hence, your return of principal and interest depends on the company’s financials. Hence, never compare your Bank FDs with NCDs.

# Repeating again…Credit Rating may change at any time

Take the case of IL&FS issue. It was highly rated and suddenly downgraded within a few months. What will happen to investors don’t know. Even though IL&FS issued secured NCDs, the possibility is high that you may get interested and principal after the deadlines.

Hence, never ever trust the credit ratings and invest.

# Take a calculated RISK

Take the calculated risk. How? Invest around 10% of your debt portfolio into such NCDs. Never invest all your debt portfolio under single NCD. Assume your corpus is around Rs.5 Cr and you are completely relying on this corpus to survive monthly, then not invest more than 10% such corpus in NCDs and that also never in a single NCD.

# Company’s Financials may change without our notice

Even if we believe credit rating remained the same, but it is hard for retail investors to follow company financials regularly. Hence, without our notice, there may be a change in financial situations or NPAs. Hence, diversify your risk in different NCDs rather than sticking all money in a single issue.