9.1% DHFL NCD May 2018 Issue – Should you invest?

9.1% DHFL NCD May 2018 Issue is open for subscription from May 22, 2018, to 4th June 2018. DHFL is going to offer Secured and redeemable NCDs. Is it worth to invest?

9.1% DHFL NCD May 2018 Issue

DHFL plans to raise Rs. 12,000 Cr. from this issue, including the green shoe option of Rs. 9,000 crore. The issue will remain open for 2 weeks and will close on June 4, unless the company decides to foreclose it.

The main purpose of this offer is for onward lending, financing, and for repayment of interest and principal of existing borrowings of the Company and General corporate purposes.

What is a Debenture?

It is a debt instrument which offers a fixed rate of interest for the fixed tenure like your Bank FDs. Usually, Companies or Governments use the tool of debentures to borrow or raise the money for their business expansion.

It is nothing but you are lending a loan to the company. In return, the company will give you an interest rate fixed for a fixed tenure.

What are NCDs (Non-Convertible Debentures)?

There are two types of debentures. One is CONVERTIBLE and another is NON-CONVERTIBLE. The convertible debentures are the ones that can be converted into equity shares at a later time. This convertibility provides an attraction to the investor but yields lower interest rates. Non-convertible debentures does not convert into equity shares thus can yield a higher interest rate.

Convertible NCDs turning to shares means you will be the part of the owner of that company.

NCDs or Non-Convertible Debentures are again two types. Once is SECURED and another is UNSECURED. Secured NCDs are backed by the issuer company’s assets to fulfill the debt obligation in case of bankruptcy of the company.

However, UNSECURED NCDs are not backed by any assets and in case company goes bankrupt, there can be an issue in paying back the bondholders. Only after the payment is made to every entity which has some security, the unsecured NCD bondholders have any chance of getting back their money. Hence, these NCD’s have high-interest rates.

9.1% DHFL NCD May 2018 Issue Features and Eligibility

# About DHFL

DHFL is an NBFC (Non-Banking Finance Company), which is active in the housing finance sector in India since 1984. DHFL provide secured finance primarily to individuals, partnership firms and companies for the purchase, self-construction, improvement and extension of homes, new and resalable flats, commercial properties and land. It also provides certain categories of non-housing loans including loans for commercial property, medical equipment, and for plant and machinery.

Dewan Housing Finance Corporation Limited (DHFL) is a deposit-taking housing finance company registered with the NHB and focused on providing financing products for the Low and Middle-income segment in India primarily in Tier II and Tier III cities and towns.

As at March 31, 2016, DHFL’s gross NPAs as a percentage of outstanding loans were 0.93%, 0.94% and 0.96% as at March 31, 2016, 2017 and 2018, respectively.

# Issue opening Date

22nd May 2018

# Issue Closes on

4th June 2018.

# Interest or Coupon Rate

The interest rate ranges from 8.56% to 9.10% depending on the category of investor and tenure of the NCDs.

# Issue Size

Base Issue size is Rs 3,000 Crore (with an Option to retain over-subscription amount up to Rs 9,000 Crores. Total Issue size Rs 12,000 Crore).

# Mode of Issue

Demat and Physical form.

# Face Value

Face Value or Issue Price of one NCD is Rs 1,000.

# Tenure of the NCD

3 years to 10 years

# Type of Interest Payment

Fixed and Floating (for NCDs with 3 year tenure).  The Floating Interest rate is determined as : Benchmark MIBOR + spread of 2.16%. The current MIBOR rate is around 6%.

# Frequency of Interest Payment

Annual and Monthly. Cumulative option is not available under this Issue.

# Minimum Application size

Rs 10,000 (10 NCDs) and in multiples of Rs 1,000 thereafter.

# Listing

The NCDs are proposed to be listed on BSE & NSE stock exchanges.

Security & Asset Cover

The Company and Promoter will create and maintain appropriate security in favor of the Debenture Trustee for the NCD Holders on the assets adequate to ensure required asset cover for the Secured NCDs.

# Credit Rating

Credit Rating of ‘CARE AAA; Stable (Triple-A; Outlook: Stable)’ by CARE Ratings Limited and ‘BWR AAA (Pronounced as BWR Triple-A), Outlook: Stable’ by Brickwork Ratings India Private Limited for Secured NCDs.

# Issue Allocation Ratio

65% of the Issue is for individual investors (HNIs – individuals (applying for an amount of > Rs 10 lakh).

# PUT & Call options

Callable Debenture means it can be redeemed by the Issuer (company) before the bond’s maturity. A debenture with a ‘Put option’ works in exactly the opposite manner, wherein the investor can sell the bond to the issuer at a specified price before its maturity.

However, in this NCD, there is no PUT or CALL options are available.

Allotment

These NCDs will be alloted based on the ‘first come, first served’ basis.

# Whether NRIs can invest?

NRIs are not eligible to apply to this NCD issue.

# Tax Deducted at Source (TDS)

The interest income would be taxable with these bonds. However, NCDs taken in a demat form will not attract any TDS. The investor will have to pay tax on the interest income while filing his/her income tax return.

However, in case of NCDs held in physical form, as per the current provisions of the IT Act, tax will not be deducted at source from interest payable on such NCDs held by the investor (in case of resident Individuals and HUFs), if such interest does not exceed Rs.5,000 in any financial year. If interest exceeds the prescribed limit of Rs.5,000 on account of interest on the NCDs, then the tax will be deducted at the applicable rate. To avoid TDS, the investors have to submit the Form 15G/15H accordingly.

Below image will give you the complete feature of 9.1% DHFL NCD May 2018 Issue details.

9.1% DHFL NCD May 2018 Issue Features

Taxation of NCDs (Non-Convertible Debentures)

Before proceeding further to blindly invest, check the tax treatment of such NCDs.

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 (like in this case of NCDs).

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

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.

If you hold the listed NCD for less than one year and on selling of the said NCD and earn the profit then such gain will be short-term capital gains (LTCG) chargeable to tax at normal rates.

Hence, you have to consider the interest income taxation and also capital gain taxation (if you sell it before maturity).

9.1% DHFL NCD May 2018 Issue – Should you invest?

# Interest Rate

If you consider the current Bank FD rates of some other debt fixed interest rates, then you notice that they are at a low end. Hence, if you are looking for some fixed return of interest on your capital, then definitely the best choice.

# Security and Credit Rating

These NCDs are secured and hence you no need to worry even if the company goes bankrupt or in financial trouble. However, never rely on current rating. Because current credit rating may change in future based company’s financial condition.

# Interest Rate Payment

This NCD not offers a cumulative type of payment. Hence, you must not treat this like Bank FDs. They pay you the interest either annual or monthly. Hence, if you are looking for some constant stream of income, then go ahead for this NCD. At maturity, you will just receive what you invested.

# Taxation of NCDs

Do remember that you have to pay the tax on whatever the interest you receive from such NCDs. Hence, always consider the returns based on post-tax returns rather than EYE catching pre-tax returns.

The formula to calculate the same is as below.

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

Hence, before proceeding further, you have to look for your NEED, RISKS and TAXATION.

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