7.75% Muthoot Finance NCD Issue Opens: Should You Invest?

Muthoot Finance Ltd's latest non-convertible debenture (NCD) issue offers 6.75-7.75% returns annually.

"At a time when interest rates have significantly come down, we are able to offer attractive interest rates to retail and HNI (high net individual) investors," said George Alexander Muthoot, managing director of Muthoot Finance.

These are Secured Redeemable NCDs that do offer attractive interest, however, should you invest in them?

Details on the NCD

• The issue remains open from 11 December 2020 to 5 January 2021.
• The issue price is Rs 1,000 per NCD with a minimum application size of Rs 10,000.
• Face value of the NCD is Rs 100.
• The base size of the issue is Rs 100 crore, but a gold loan-focused, non-banking financial company (NBFC) can raise it up to Rs 900 crore.
• It is the second tranche of the Rs 4,000 crore NCD issue. In the first tranche that was open in October-November, Muthoot Finance had raised Rs 2,000 crore, offering returns between 7.15% and 8%, annually.
• The net proceeds will be utilised for lending (minimum of 75% of the amount raised) and general corporate purposes (not more than 25% of the amount raised).
• The issue has been rated AA with a positive outlook by Crisil Ltd and AA with a stable outlook by Icra Ltd.
• The allocation to the NCDs will be done on a first-come-first-serve basis.
• These are proposed to be listed on BSE.
• The payout option choices: monthly, annual and on maturity.

Investment options

Option/Series	I	II	III	IV	V	VI
Tenor	38 months	60 Months	38 months	60 Months	38 months	60 Months
Interest Frequency	Monthly	Monthly	Annual	Annual	NA	NA
Coupon Rate (% p.a.) Cat I, II, III, IV	6.75%	7.10%	7.00%	7.35%	NA	NA
Effective Yield (% p.a.) Cat I, II	6.75%	7.10%	7.00%	7.35%	7.00%	7.35%
Effective Yield (% p.a.) Cat III, IV	7.15%	7.50%	7.40%	7.75%	7.40%	7.75%
Amount (Rs/NCD) on Maturity - Cat I, II	Rs 1,000	Rs 1,000	Rs 1,000	Rs 1,000	Rs 1,239.34	Rs 1,425.64
Amount (Rs /NCD) on Maturity - Cat III, IV	Rs  1,000	Rs 1,000	Rs 1,000	Rs 1,000	Rs 1,254.11	Rs 1,452.40

Should you invest?

The issue has been rated AA with a positive outlook by Crisil Ltd and AA with a stable outlook by Icra Ltd. This rating indicates that these NCDs come with a high degree of safety regarding timely servicing of financial obligations, however, they are not as safe as AAA-rated instruments.

Further, NCDs are labelled secured in nature, which means that in the event of liquidation, they will be backed by the company's assets, but in a case of bankruptcy, repayment could take longer than actual maturity period.

After DHFL (Dewan Housing Finance Limited) defaulted its payments on secured NCDs for a principal amount of Rs 50 crore due on 3 July 2020, payments to the lenders or NCD holders remain in abeyance and will be subject to the outcome of the CIRP process

It is therefore important to understand that NCDs hold the risk of non-payment if there a change in the business conditions of the NBFC by the time it matures.

Moreover, redeeming NCDs before maturity might be a challenge, as the Indian debt market is not that deep. There are also tax implications on the interest earned that need to be considered.

Disclaimer

The article is purely informational and is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.

About the author

Olga Robert is an M.Com graduate covering equity markets and personal finance for nearly three years. Her interests include tax planning, equities, DIY personal finance management and government schemes.