DHFL NCDs May 2018 Public Issue : Details & Review

The interest rates on Bank fixed deposits may have touched the lowest levels and the interest rates on popular small savings schemes are not very attractive either. Also, Tax Free Bond Issues are not available now. This is inducing many small investors to look out for better fixed income products which can give decent fixed rate of return.

NCDs or Non Convertible Debentures are one of the fixed income options that can satiate investors’ hunger for better yield.

Dewan Housing Finance Corp Ltd (DHFL) is proposing to offer latest NCD issue. DHFL is going to offer Secured and redeemable NCDs. The proposed public issue will be open for subscription from 22nd May, 2018 to 04th June, 2018.

Latest update (24-May-2018) : Please note that DHFL has announced early closure of May 2018 Issue. Last date of the Issue is 24^th May 2018.

One of the key features of this issue is, it offers ‘Floater interest rate‘ option on a 3 year tenure NCD option.

What is a Debenture?

Debenture is a type of Debt instrument which offers a fixed rate of interest for a specified tenure. Companies or governments use debentures to borrow money. Debentures are simply loans taken by the companies and do not provide the ownership in the company.

What are NCDs?

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

An NCD can be Secured or Unsecured. Secured NCDs are backed by the issuer company’s assets to fulfill the debt obligation unlike unsecured NCDs. Below is a short video on ‘basics of NCDs’.

DHFL NCDs May 2018 Public Issue – Key Features

DHFL is a non-banking finance company, which has been active in the housing finance sector in India since 1984. They 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 (LMI) 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.

Below are the few important details about upcoming DHFL NCD Issue in FY 2018-19;

• NCD Issue opening Date : 22nd May, 2018
• Issue Closes on : 4th June, 2018.
• Interest Rate or Coupon Rate on NCDs : The ROI 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 cr (with an Option to retain over-subscription amount up to Rs 9,000 Crores. Total Issue size Rs 12,000 cr).
• Mode of Issue : Demat & Physical form.
• Face Value or Issue Price of one NCD is Rs 1,000.
• Available Tenor options : 3 years to 10 years
• Type of Interest Payment : Fixed & 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 / Monthly. Cumulative option is not available under this Issue.
• Minimum Application size : Rs 10,000 (10 NCDs) and in multiple 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 favour of the Debenture Trustee for the NCD Holders on the assets adequate to ensure required asset cover for the Secured NCDs.
• Credit Ratings :  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 : No Put & Call options are available. (What are Put & Call options? – NCDs can have Put or Call options. If a company issues a ‘Callable Debenture’, it means that 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.)
• Allotment of NCDs is on ‘first come, first served’ basis.
• NRIs are not eligible to apply to this NCD issue.
• The retail investors who are Senior citizens applying, are eligible for an additional incentive of 0.10% p.a. provided the NCDs issued are continued to be held by such investors on the relevant Record Date applicable for payment of respective coupons.

Rate of Interest on DHFL’s Latest NCD Issue (May-June 2018) 

(Benchmark MIBOR is as published by FBIL computed on an annulised basis. Subject to reset annually based on Overnight MIBOR benchmark rates.)

Should you invest in DHFL’s Latest NCD (May 2018) Issue?

As we all are aware that interest rates on fixed income securities have reached their lowest levels. The bank interest rates are showing some signs of up-trend, hence it is advisable to avoid investing in medium to long-term NCDs now. Also, the NPA (Non-Performing Assets) related problems have been plaguing the banking sector (NBFCs as well). Considering this scenario, if you are looking for regular interest income and are in 10% or 20% income tax slab rate, you may consider investing in up to three year Secured NCDs. You may opt for fixed or floater rate interest option.

This issue does not have Cumulative option (where interest is paid on maturity of NCDs). So, you have to select either annual or monthly interest payment option only.

Before investing in NCDs, kindly calculate your post tax returns on debentures and take your decision, as the interest payouts are taxable.

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

Are NCDs totally risk-free? – No, they are not risk-free. These carry higher risk than bank deposits. The main risk with NCDs is default risk. The issuer may not be able pay the interest payments.

NCDs are relatively safer assets than Stocks and mutual funds but they are riskier than bank FDs and Government bonds. NCD Issuers normally do not default but when things go drastically wrong, they may face problem in paying the investors.

The main risk with NCDs is default risk. The issuer may not be able to pay the interest payments. NCD Issuers, especially the top business groups, normally do not default but when things go drastically wrong, they may face problem in paying the investors. In such a scenario, secured NCD holders (if any) would be given higher priority than the holders of Subordinated NCDs.

Kindly keep in mind all the above points when investing in NCDs. Also, do not invest your entire savings or investible surplus in one NCD issue alone.

You may consider other alternative fixed income avenues like Debt oriented Mutual Funds, Hybrid Mutual Funds, Post office MIS scheme, Post office Senior Citizen Savings Scheme, 7.75% GoI Bonds etc.,

Have you invested in any of the recent Public Issues of NCDs? Do you prefer NCDs to Bank FDs? Do you believe that upcoming NCDs may offer even better interest rates? Kindly share your views. Cheers!

Continue reading :

• What are NCDs? How to buy best NCD? Tax Implications on NCDs
• What if the RBI hikes interest rates in 2018-19? | RBI’s Rate hike & Its Impact on the Economy & Personal Finances
• List of Best Investment Options

(Featured Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net) (Post first published on : 16-May-2018) (This article is based on limited available information, if required, the content will be edited.)