India’s biggest public sector bank, State Bank of India, has given a new year gift to thousands of its borrowers on Sunday by cutting its 1-year MCLR rate by 0.90% from 8.65% to 7.75%. This move by SBI has resulted in a slew of rate cut announcements by public sector banks, which should be followed by private sector banks taking such decisions very soon. Reducing lending rates with such steep cuts is the need of the hour as banks are flushed with unprecedented liquidity and our economy needs cheaper loans to keep itself growing in these toughest of the times.
Unfortunately, lower interest rate environment results in a fall in deposit rates as well and that has been the case with most of the fixed income investments, including fixed deposits (FDs) and non-convertible debentures (NCDs). One such NCD issue is getting launched from today and the company that is launching this issue is SREI Equipment Finance Limited.
Let us take a look at the salient features of this issue.
Size & Objective of the Issue – Base size of this issue is Rs. 250 crore, with the green-shoe option to retain an additional Rs. 250 crore, thus making it a Rs. 500 crore issue. The company plans to use at least 75% of the issue proceeds for its lending activities and to repay its existing loans and up to 25% of the proceeds for general corporate purposes.
Coupon Rate & Tenor of the Issue – The issue will carry coupon rate of 9.12% p.a. payable monthly and 9.50% p.a. payable annually or cumulative for a period of 3 years (36 months) and 9.35% p.a. payable monthly and 9.75% p.a. payable annually or cumulative for a period of 5 years (60 months). There is one more option of 400 days which carries an effective annual yield of 8.81%.
Minimum Investment – Investors need to apply for a minimum of ten bonds in this issue with face value Rs. 1,000 each i.e. a minimum investment of Rs. 10,000.
Categories of Investors & Allocation Ratio – The investors have been classified in the following three categories and each category will have the below mentioned percentage fixed in the allotment:
Category I – Institutional Investors – 30% of the issue i.e. Rs. 150 crore
Category II – Non-Institutional Investors – 20% of the issue i.e. Rs. 100 crore
Category III – Individual & HUF Investors – 50% of the issue i.e. Rs. 250 crore
Allotment will be made on a first-come first-served basis, as well as on a date priority basis i.e. on the date of oversubscription, the allotment will be made on a proportionate basis to all the applicants of that day on which it gets oversubscribed.
NRIs Not Allowed – Non-Resident Indians (NRIs), foreign nationals and qualified foreign investors (QFIs) among others are not eligible to invest in this issue.
Credit Rating & Nature of NCDs – Brickwork Ratings has rated this issue as ‘AA+’ and SMERA has rated it as ‘AA’, with ‘Stable’ outlook by both the rating agencies. Debt instruments with such a rating are considered to have high degree of safety regarding timely payment of interest and principal. Moreover, these NCDs are ‘Secured’ in nature i.e. in case of any default on its payment of interest or principal, the bondholders will have the right on certain secured assets of the company.
Listing, Premature Withdrawal & Put/Call Option – These NCDs will be listed on both the stock exchanges i.e. Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). The listing will take place within 12 working days after the issue gets closed. Though there is no option of a premature redemption, the investors can sell these bonds on the stock exchanges if NCDs are held in demat form.
Demat Not Mandatory – Demat account is not mandatory to invest in these NCDs as the investors have the option to apply for these NCDs in physical or certificate form as well.
TDS – Interest income earned is taxable with these NCDs and the investors are required to pay tax on the interest income as per their respective tax slabs. TDS @ 10% will be deducted if these NCDs are held in physical/certificate form and annual interest income is more than Rs. 5,000. NCDs held in demat mode will not attract any TDS.
Should you invest in SREI Equipment Finance NCDs?
SREI Equipment Finance Limited (SEFL) is a wholly-owned subsidiary of SREI Infrastructure Finance Limited (SIFL) which is a listed company on the BSE and NSE and came up with its own issue of NCDs in September this year. Below pasted is the table having issue details, NSE scrip codes and last traded prices of those NCDs.
As on March 31, 2016, the parent company SREI Infra carried net worth of Rs. 3,539 crore, while SEFL had a net worth of Rs. 2,322 crore. SIFL reported Gross NPAs of 4.02% and Net NPAs of 3.09%, while SEFL’s asset quality was relatively better at 2.95% of Gross NPAs and 1.99% of Net NPAs.
SREI Infra reported a profit of Rs. 61.53 crore on a turnover of Rs. 2,862 crore, while SEFL earned profits of Rs. 115.26 crore with revenues from operations of Rs. 2,614 crore. So, the operational performance of these companies favour SREI Equipment Finance over its parent company SREI Infra and probably that is why Brickwork Ratings has assigned it ‘AA+’ rating to the issue.
However, I think retail investors would do well to either avoid this issue or invest a maximum of 10% of their investible surplus in order to have a high interest rate investment in their portfolio in a falling interest rate scenario. Investors can also consider investing in already listed NCDs of SREI Infra or some other company from the markets at a better yield. Investors in the 30% or 20% tax bracket should avoid such taxable NCDs.
Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in SREI Equipment Finance Limited (SEFL) NCDs, you can reach us at +91-9811797407