Five things to check before you invest in NCDs

The weakness in the stock markets and the high returns offered by debt instruments are making investors rush to the safety of fixed income options. After fixed deposits and FMPs, non-convertible debentures (NCD) have caught the fancy of investors. Right now, the NCD issue of India Infoline Investment Services was open for investment, with the company offering 11.9% on the 5-year bonds. Three more issues are in the pipeline. However, before investing in these bonds, here are a few things you should check.

How safe is your capital?

You are investing in debt because you want safety, right? However, private issuers can default on the repayment of the principal. This is where the credit rating of bonds comes into focus. Credit rating is an independent assessment of the ability of the issuer to meet its financial commitments. It's important because it also determines the price that a bond will command in the secondary debt market. A high rated bond will fetch a higher price than a bond with a lower rating.

The rating assigned to a bond is not for perpetuity as it may change with the fundamentals of the issuing company. Any downgrading of rating will bring down the price of the bonds in the secondary market. So, you need to keep your eyes open for any change in the rating of the bonds that you hold. Any variation in rating is usually announced by the agency and reported in the media.

Is the issuer on a sound footing?

Unlike in the case of bank deposits, which are insured up to `1 lakh, investments in non-convertible debentures are not backed by any guarantee. However, as a lender to the company, an investor in NCDs has the first right over the company's assets if it faces liquidation. However, this information is useful only if the company has sufficient assets. So, before investing, take a look at the company's financials. Check whether it is sufficiently capitalised and if it has a healthy book value. "Stay away from companies that have a highly leveraged balance sheet," says Ritesh Jain, head of investments, Canara Robeco Mutual Fund. A little bit of spadework here can save you a lot of heartburn later.

How liquid is the investment?

The investor is not obligated to hold the debenture till maturity because it can be traded in the secondary debt market. That's the theory. The reality is that these instruments are not very liquid and have very few buyers. So, check the liquidity of similar instruments issued by the company before you are taken in by the sales pitch. You may find that some NCDs are not traded for days, which is not the state of liquidity you expect from a product sold on a national exchange.

Is there a put and call option?

Some NCDs come with riders called put and call options. The put option means that the investor has the right to sell the NCD back to the company after a specified period, while the call option gives the company the option to repay prematurely. While the put option favours the investor in a rising rate scenario, the call option acts as a cushion for the company if the rates fall and it wants to retire the high-yielding NCDs prematurely. Find out whether the put and call options suit your needs before you invest in the NCD. For instance, the five-year NCDs by Shriram Transport Finance have a put and a call option after 48 months, whereas the Indian Infoline Investment Services NCD does not have any put or call option.

What is your post-tax yield?

Lastly, consider the tax implications of the investment. The yields being advertised by the issuers obviously do not take into account the tax liability of the investor. Any income from the NCD is to be added to the total income for the year and taxed at the normal rate. In the 10% tax bracket (income of up to `5 lakh a year), the 11.5% yield drops to 10.35%. In the 20% tax bracket (income of up to `8 lakh a year), it falls to 9.2%. And in the highest 30% tax bracket, it is barely above 8%, which is no more than that offered by the PPF.

Happy Independence Day

Registration must for alternative investments

The Securities and Exchange Board of India (Sebi) on Monday framed a separate set of regulations for ‘alternative investments’ now classified as ‘collective investment schemes’. 

The new rules will apply to all hedge funds, real estate, private equity, debt, venture capital, private investment in public equity, infrastructure, social venture, strategy and small and medium enterprise funds. 

While debt funds would mean all unlisted debt instruments, social or strategic investment funds would also cover investments into art or pieces of heritage and more. 

In a discussion paper put out on Monday, comments for which have been invited till August 30, Sebi has laid out detailed eligibility and registration criteria and fund structure. 

The move is aimed at safeguarding investors from falling prey to dubious schemes of portfolio managers. 

Under the proposed regulations, it would be necessary for all private pools of capital and investment funds to seek registration with Sebi. 

The funds could be formed as companies, trust or bodies corporate, including limited liability partner structure. The regulations would require that the fund manager, asset management company or trustees of the fund be specified, and change of such entities be reported to the regulator. 

Also, all these funds will have to mention their categories, the targeted size of the proposed fund, life cycle and the target investor, said Sebi. 

Sebi has also specified that funds will have to be raised only through private placement of information memorandum and all schemes will be close ended in nature. 

Minimum investment would be 0.1 per cent of fund size subject to a minimum floor of Rs 1 crore. Sebi has specified that the minimum size of the fund would be Rs 20 crore. 

“The minimum inv estment criterion would prevent retail investors straying into such funds and the granularity would ensure a maximum number of investors at 1,000, precluding the possibility that some funds might disguise themselves as private pools while approaching a large number of retail investors,” said Sebi. 

In case of an alternative investment scheme constituted as company or limited liability partner firm, the number of shareholders or partners may not exceed 50 and the size of issue will not be less than Rs 10 lakh.

Misuse of Banking Channels – Issue and Payment of Demand Drafts for Rs. 50,000/- and above

RBI/2011-12/135

DBOD.BP.BC. No. 26 / 21.01.001/2011-12, Dated- August 1, 2011

Misuse of Banking Channels – Issue and Payment of Demand Drafts for Rs. 50,000/- and above

Please refer to our circular DBOD.BP.BC.No.114/C.469(81) – 91 dated April 19, 1991 in terms of which demand drafts, mail transfers, telegraphic transfers and travellers cheques for Rs.50,000 and above should be issued by banks only by debit to the customer’s account or against cheques or other instruments tendered by the purchaser and not against cash payment. These instructions were extended to retail sale of gold/silver/platinum vide our circular DBOD.No.IBS.1816/ 23.67.001/98-99 dated February 4, 1999.

2.  It has been brought to our notice that some banks have recently issued demand drafts of Rs. 50,000 and above on deposit of cash and not against debit to the customer’s account or against cheques or other instruments tendered by the customer.

3.  In the current scenario where the integrity of the financial system in general and the banking channels in particular is of paramount importance, breach of these guidelines is a matter of serious regulatory concern in view of the wide ranging ramifications.

4. In the above context, we reiterate that the instructions conveyed vide our circular dated April 19, 1991 referred to above may be strictly complied with by banks. Any violation of these instructions will be viewed seriously.

Yours faithfully,

(P. R. Ravi Mohan)

Chief General Manager

NBFCs, MFs can launch infra debt funds

Taking a cue from government’s interest in raising funds for infrastructure financing, the Securities and Exchange Board of India (Sebi) has allowed both existing mutual funds and non-banking finance companies (NBFCs) to launch infrastructure debt funds (IDFs).

Schemes would invest 90 per cent of its assets in debt securities of infrastructure companies or special purpose vehicles (SPVs) across all infrastructure sectors. Funds could launch close-end schemes that have a maturity of more than five years or it could also introduce interval schemes with a lock-in period of five years. Even companies that have been in the infrastructure financing sector in the last five years can set up a fund.

Under the guidelines, these companies can have a minimum of five investors where no single investor shall hold more than 50 per cent of assets. Strategic investors could invest up to to Rs 25 crore in the fund. 

The minimum investment into the fund would be Rs 1 crore with the minimum lot size being Rs 10 lakh for the unit. “Given that, the quantum of funds that can be invested is high, it will attract institutional buyers and high networth individuals (HNIs),” says Amar Ranu, senior manager, third-party products research, Motilal Oswal Wealth Management.

However, one can expect some liquidity since the fully paid units of the funds shall be listed on stock exchanges. Mutual funds launching these funds may issue partly paid units to its investors.

According to the government’s 12th Five Year Plan, it has planned $1-trillion investments in infrastructure projects. It was $500 billion during the 11th Plan (2007-12) and the government has been keen to raise funds through debt instruments like bonds and other routes such as units in the capital markets.Finance Minister Pranab Mukherjee had announced tax breaks for IDFs in his budget speech for this fiscal (2011-12), to attract foreign investments in the various infrastructure projects.

In the earlier guidelines for released by Reserve Bank of India in June 2011, NBFCs who set up these IDFs have been permitted to sell bonds to refinance public private projects, once the construction is complete. This would also help PPPs to attract long term funds at lower costs because of lower risk. However, in terms of attracting investments, IDFs would have to compete with the existing triple AAA rated papers which provide a liquid market.

source: Business Standard

Mutual Fund: Updating your folio with New bank details

We sometimes hear an investor say, “I have changed my bank account and did not inform the mutual fund. I have received a dividend cheque with the old bank details printed therein. Please resend the cheque with the new bank details.” 

Credit to an investor account may usually not happen if the account has been closed and the investor has to request for a fresh cheque. 

It is therefore imperative to update the current bank details in your folio. We give below a checklist for investors to ensure correct and speedy payout of dividend and redemption proceeds. 

Core-banking account number: There could be a change in bank details as an investor's bank may have installed Core-Banking Solutions. Investors should remember to update the new account number. 

This can be updated by sending a written request duly signed by the unit holder(s), along with a cancelled cheque leaf with the investor's full account number printed therein, to update the same. 

IFSC Code: IFSC or Indian Financial System Code is the electronic address of the bank branch where funds would be transferred. It is an alpha-numeric code containing 11 characters, allotted by the RBI to uniquely identify bank branches in India. 

Investors who register their IFSC codes in their folios will be eligible to get electronic payouts through National Electronic Fund Transfer (NEFT) / Real Time Gross Settlement (RTGS). Attach a cancelled cheque leaf reflecting the code, along with a signed request to get the same updated. 

Mode of payout: While sending a request to update the IFSC code in the folios, investors may also request for the mode of payout of dividend / redemption proceeds in the folio to be changed to electronic. 

Opting for the electronic mode of payout ensures a faster, safer and more definite receipt of payout compared to cheques. 

Registration / Deletion of bank account(s): Mutual Funds now offer a facility to individual investors to register up to five bank accounts in a folio. 

To register additional bank accounts, investors have to fill in the registration form. Forms are available at the mutual fund websites / service centres. Investors have to attach a cancelled cheque leaf with their name and account number printed therein or a copy of the bank pass book / statement of bank account containing the name and address of the account holder and account number. 

This copy should be certified by the bank manager with his / her full signature, name, employee code, bank seal and contact number. 

Registering for this facility enables you to receive redemption proceeds into any one of the registered bank accounts of your choice without having to provide for bank details and the supporting documentation at the time of redemption. 

A point to note is that mutual funds now have a cooling period before payout of redemption proceeds if an investor opts for a change in bank details at the time of redemption. Some funds may even not process a change in bank details if requested along with redemption.

The same form used for registering additional bank mandates has a section for deleting a bank account and investors should ensure that accounts not in use are deleted. 

Default Bank Account: At the time of registering multiple bank accounts, investors have to specify any one bank account as a ‘Default' bank account. Dividend proceeds are processed only into this ‘Default' bank account. Investors may specify any of the bank accounts for the credit of redemption proceeds. If no account is specified in the redemption request, redemptions will be processed into this default bank account.