DHFL NCD -A Good Fixed Income Opportunity

DHFL NCD -A Good Fixed Income Opportunity?

It’s not just the IPO market which is buzzing, but also the debt market, which is providing back-to-back opportunities not only to lock-in your monies at higher fixed interest rates vs. Bank FDs but are also offering scope for capital appreciation. The last 3 months saw the launch of Edelweiss Housing Finance NCD & Mahindra & Mahindra Financial Services NCDs, while August will witness the launch of Dewan Housing Finance Ltd’s (DHFL) Non-Convertible Debenture (NCD).

DHFL is a housing finance company focused on lending to low-and-mid-income customers in India’s tier-2 & tier-3 towns and cities.

Details of Dewan Housing Finance Ltd’sNon Convertible Debenture (NCD) Issue

This NCD issue is being offered for a tenor of 3, 5 & 10 yrs with corresponding effective yields of 9.2%, 9.25% & 9.3% per annum respectively for retail/ HNI investors. Further details of the issue are mentioned below.

Tenor (yrs) Effective Yield* Frequency of Interest Payment
3 9.20% Annual/ Maturity
5 9.25% Annual/ Maturity
10 9.30% Monthly/ Annual/ Maturity
3 9.20%*** (Floating rate linked to inflation – CPI) Annual

*Effective yield per annum for both Retail & HNI Investors

***For the 1st year and subject to reset annually based on Reference CPI for the 2ndand 3rd years

Source – Company

The interesting feature is the introduction of floating interest rates linked to inflation as mentioned in Consumer Price Index (CPI) for 3 year tenor. The Retail & HNI investors will be paid CPI+4.18% pa in this feature.

Issue Size Base Issue Size of Rs. 1,000 crores with an option to retain over-subscription uptoRs. 4000 crores. The maximum issue size for Retail & HNI investors is Rs. 1,200 crores each
Issue Open Date 03rd Aug, 2016, Wed
Issue Close Date 16th Aug, 2016, Tuesday
Allotment Basis First cum First Serve
Face Value Rs. 1,000/-
Application Acceptance Time 10 am to 5 pm. On issue closing date, forms will be accepted only until 3 pm
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 Redeemable Non-Convertible Debenture
Interest Payment Monthly/ Annual/ Cumulative
Listing The bonds will be listed on NSE 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 CARE AAA & BWR AAA
Issuance Mode Demat& Physical
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 alongwith the application form.

1. ASBA (Application Supported by Blocked Amount) facility can be used to apply in demat form only

a.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.

b.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

2. Non-ASBA applicants – Application for allotment of NCD in physical mode can only be made through non-ASBA medium

a.Online – The direct online application facility through stock exchange will not be available.

b.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 DHFL’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 3, 5 & 10 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 NSE) 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 DHFL’s NCDs as they offer higher interest rates vs. Bank FDs with high safety (AAA rated) combined with opportunity to exit before maturity and earn capital gains in 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!