Muthoot Finance NCD – Attractive Fixed Income Opportunity

Several retail investors are disappointed and flummoxed after the recent steep fall in interest rates of  Bank Fixed Deposits post demonetization. With bank FD rates being reduced to 5-7%, the post tax returns of those falling in higher tax brackets may miserably fail to beat inflation.

But here is some reason to cheer  –Muthoot Finance, India’s largest gold loan company, is providing an opportunity to earn higher fixed returns through the issuance of its Non Convertible Debentures (NCDs).

Details of Muthoot Finance Non Convertible Debenture (NCD) Issue

This NCD issue is being offered for a tenor of 2, 3, 5 & 8 yrs with corresponding effective yields of 9%, 9.25%, 9.25% & 9.06% (cumulative) respectively for retail/ HNI investors for an annual interest payment option. Further details of the issue are mentioned below.

Interest Payment Frequency Monthly Monthly Monthly Annually Annually Annually
Tenor 2 yrs 3 yrs 5 yrs 2 yrs 3 yrs 5 yrs
Coupon Rate* 8.75% 9.00% 9.00% 9.00% 9.25% 9.25%


Interest Payment Frequency Cumulative Cumulative Cumulative Cumulative Cumulative
Tenor 400 days 2 yrs 3 yrs 5 yrs 8 yrs
Coupon Rate* 8.25% 8.50% 8.75% 9.00% 9.06%

*Coupon Rate mentioned is Effective yield per annum for both Retail & HNI Investors

Source – Company

Issue Size Base Issue Size of Rs. 200 crores with an option to retain over-subscription upto shelf limit of Rs. 1,400 crores
Issue Open Date 17th Jan, 2017, Tue
Issue Close Date 17th Feb, 2017, Fri
Allotment Basis First cum First Serve
Face Value Rs. 1,000/-
Minimum Application Amount Rs. 10,000/- (10 NCDs) & in multiples of Rs. 1,000 (1 NCD) thereafter
Maximum Deposit Amount For retail investors, the maximum investment limit is capped at Rs. 10 lacs.

For HNI investors, the minimum investment amount is Rs. 10 lacs.

Nature of Deposit Secured & Unsecured Non-Convertible Debenture
Interest Payment Monthly/ Annual/ Cumulative
Listing The bonds will be listed on exchange and will be available for trading post listing
Eligibility Resident Indian individual, HUF, HNI, QIB,  Corporates
Withdrawal There is no lock-in period. One can sell these bonds in the secondary market after they are listed on the exchanges
Credit Rating [ICRA] AA (Stable), CRISIL AA/ Stable
Issuance Mode Compulsorily in Demat form
Tax Treatment Interest earned on these bonds is taxed at marginal tax rate of the individual/ HUF investor. But if capital gains arises by selling these bonds in the secondary market then capital gains tax will arise – Short-term capital gains tax (<1 yr holding period) levied at marginal tax rate (based on an individual’s tax slab) while Long-term capital gains tax (>1 yr holding period) levied at 10% without indexation benefit.

Source – Company

How to Apply to the Issue?

The bonds will be issued in a dematerialized or physical format For those applying to the issue in the physical mode, PAN copy, address proof and cancelled cheque also need to be submitted along with the application form.

  1. ASBA (Application Supported by Blocked Amount) facility can be used to apply in demat form only
    1. Online – Electronic application forms can be downloaded from websites of SCSBs that permit submission of ASBA applications electronically. These forms will be available on their websites at least 1 day prior to issue opening date.

    2. Physical Form – Application forms can be filled and submitted to Brokers, Lead Managers, Members of Syndicate or Trading Members at select locations/ designated branches

Please note that ASBA applicants can make an Application for allotment of NCDs in demat form only

  1. Non-ASBA applicants – Application for allotment of NCD in physical mode can only be made through non-ASBA medium
    1. Online – The direct online application facility through stock exchange will not be available.

    2. Physical Form – Application forms can be filled and submitted to Brokers, Lead Managers, Members of Syndicate or Trading Members at select locations/ designated branches

You may reach out to us in case you are facing difficulties in filling/ submitting the application.

GreenEdge Wealth Services’ View – Should You Invest in Muthoot Finance’s NCD?

These NCDs score over bank FDs as they offer ~2% to 2.5% higher rates vs. Bank FDs to Retail/ HNI investors. The interest earned from these NCDs will attract marginal tax rates similar to bank FDs.

The tenor of 2, 3, 5 & 8 years is certainly long but there is an opportunity to exit this investment before maturity in the secondary market (the issue will get listed on exchange) and earn capital gains.  If the interest rates in the market declines, then bond price could increase & one could book profits by selling it in the secondary market (decent liquidity available) – This profit will be taxed as per your marginal tax rate if holding period is less than 1 year else  it’ll be taxed @ 10% without indexation.

In our view, retail/ HNI investors can allocate a small portion of their fixed income portfolio to Muthoot Finance’s NCDs as they offer higher interest rates vs. Bank FDs with high safety (AA rated) combined with opportunity to exit before maturity and earn capital gains on secondary market.

Also, please note that this issue is on First-Come-First-Serve basis; so you should apply on the ‘issue open date’ itself!