JM Financial Products NCDs Aug-Sep 2019 Public Issue : Details & Review

The Reserve Bank of India (RBI) has recently released its second bi-monthly rate review of financial year 2019-20. The key announcement under the policy is the rate cut by 25 basis points (1 bps is 0.01%). This is the third consecutive rate cut from RBI , after a rate cut in February & April of 2019. 

In view of the above, most of the banks and corporates may reduce the interest rates on their deposits schemes, Bonds, NCD Public Issues etc.,

SBI cuts interest rates on Fixed deposits pic
Latest news – SBI cuts interest rates on Fixed deposits

This may induce 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. But, don’t forget this rule of thumb – “the higher the risk, the higher the potential return.” 

Fixed income investors were spoilt for choice with four public issues of non-convertible debentures (NCDs) worth around Rs 25,000 crore were launched in the recent past to raise money to meet credit demand. The recent NCD Issues were offered by L&T Finance, Muthoot Finance, Indiabulls Consumer Finance, Manappuram Finance, India Infoline, TATA Capital, Indiabulls Commercial, Shriram Transport Finance etc.,

JM Financial Products (JMFPL) is proposing to offer latest NCD issue. ICFLis going to offer Secured redeemable NCDs. The proposed public issue of these Bonds will be open for subscription from 6th August, 2019 to 4th September, 2019.

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’.

JM Financial Products NCDs Aug-Sep 2019 Public Issue – Key Features

JM Financial Products is a non-banking finance company,. JMFPL is focused on offering a broad suite of secured and unsecured loan products which are customized to suit the needs of the corporates, SMEs and individuals. Company broadly operates under four verticals as follows;

  • Real Estate Financing
  • Structured Financing
  • Capital Market Financing
  • SME Financing

Below are the few important details about upcoming JM Financial Credit Solutions Aug 2019 NCD issue (FY 2019-20) ;

  • NCD Issue opening Date : 6th Aug, 2019
  • Issue Closes on : 4th September, 2019.
  • Interest Rate or Coupon Rate on NCDs : The ROI ranges from 9.85% to 10.4% depending on the category of investor and tenure of the NCDs.
  • Tranche II Issue Size : Base Issue size is Rs 100 cr (with an option to retain over-subscription amount of up to Rs 400 cr for Tranche-II.)
  • Mode of Issue : Demat only
  • Face Value or Issue Price of one NCD is Rs 1,000.
  • Available Tenor options : 38 / 60 / 84 months
  • Frequency of Interest payment : Monthly & Annual. Cumulative options are also available.
  • 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 stock exchange.
  • 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 “[ICRA] AA” (Stable) for an amount of up to Rs. 2,000 Crore, by ICRA and “CRISIL AA/STABLE” for an amount of up to Rs. 2,000 Crore, by CRISIL.
  • Issue Allocation Ratio : 40% of the Issue is for retail investors & 40% for HNIs (HNIs – individuals (applying for an amount of > Rs 10 lakh).
  • PUT & Call options : Call option is available after 36 months for 60 month NCD series. (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 serve’ basis.
  • NRIs are not eligible to apply to this NCD issue.

JM Financial NCDs Aug-Sep 2019 Public Issue & Coupon Rates

JM Financial NCDs Aug-Sep 2019 Public Issue & Coupon Rates Interest rates JM Financial Products NCD Issue
JM Financial Products Aug 2019 NCD Issue – Interest Rates

The retail investors who are Senior Citizens (above 60 years of age) on the Deemed Date of Allotment shall be eligible for an additional incentive of 0.10% p.a.

Accordingly, the amount payable on redemption of Secured NCDs issued under 38 months Series and 84 months Series to such Senior Citizens is Rs. 1,364.45 and INR 2,012.70 per NCD respectively.

The additional Coupon/Interest will be paid either on the NCDs allotted on the Deemed Date of Allotment or held on the Record Date, whichever is lower, and will not be paid for the NCDs bought/acquired by the NCD Holders through secondary market/open market.

Debentures & Taxation 

  • TDS is not applicable on the listed debentures’ interest payouts (which are in Demat form). Else, TDS will be applicable if the interest exceeds the threshold limit of Rs.5,000/- in a financial year.
  • Interest earned on NCD bonds is taxable as per the tax slab of the investor.
  • If you sell NCDs on stock exchange before one year from the date of purchase, Short Term Capital Gains Tax is applicable. Tax rates depend on the tax slab you fall into.
  • If you sell NCDs on stock exchange before maturity but after one year, Long Term Capital Gains Tax (if any) at 10% without indexation is applicable.
    • Listed Debentures : Holding period 1+ year to qualify as LTCG. LTCG tax rate @ of 10% without indexation & STCG tax rate is as per ‘income tax slab rate’.
    • Unlisted Debentures : Holding period of 3 year to qualify as LTCG. STCG is taxed @ as per income tax slab rate. LTCG of 20% without indexation.

Should you invest in JM Financial Credit Solutions NCDs Aug-Sep 2019 Public Issue?

As we all are aware that interest rates on fixed income securities might have reached their lowest levels. The interest rates offered on Secured NCDs look attractive when compared to other fixed income products like bank deposits or small saving schemes .

But, the NPA (Non-Performing Assets) related problems have been plaguing the banking and NBFC sector. The current cash/liquidity crunch (DHFL / IL&FS Saga) may also have a deeper impact on NBFCs businesses in the near future.

Its surprising to notice that 80% of allocation in this Issue has been ear-marked for retain investors only. Is JM Financials not confident to raise money from the Financial Institutions? Also, the Credit rating given to this Issue is not of the highest standard.

Considering all these pointers and current economic scenario, given a choice, I will not put my money in this NCD issue.

In case, you are OK with taking some high risk, you can look at 38 month NCD series. But, kindly understand the risks associated with NCDs and then take informed decision.

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. Ex – DHFL’s case.

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. But, do not invest your entire investible surplus in one Company’s NCD Issue. Also, avoid investing in long-tenure NCD options.

You may consider other alternative fixed income avenues like Debt oriented Mutual Funds, Hybrid Mutual Funds, Tax Free Bonds from secondary market, Post office MIS scheme, PPF, Post office Senior Citizen Savings Scheme, 7.75% GoI Bonds etc., as per your risk profile and investment horizon.

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(Post published date : 02-August-2019)

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