Fixed Income
How safe is India Infoline’s non convertible debenture issue?

With debt issues becoming more opaque with each passing day, is it wise enough to invest? The answer lies in the fact that it is good to do some ground work before deciding whether or not to invest

 

A few days ago, my banker sent me a flyer about a non convertible debenture (NCD) issue from India Infoline. It has a six-year repayment duration and a coupon of 12.75% per annum (p.a.). This being one of the highest coupons available for a financial services company, I was curious. And it also enjoys a double A minus (AA-) rating from CRISIL and ICRA.

A fine print in the first page tells me that it is a "subordinated debt". In essence, on liquidation, there are going to be others in the queue that will have to be paid off in full. My banker did not mention this in his mailer.

'"Subordinated Debt" means an instrument, which is fully paid up, is unsecured and is subordinated to the claims of other creditors and is free from restrictive clauses and is not redeemable at the instance of the holder or without the consent of the supervisory authority of the non-banking financial company'. (From the offer document).

"The NCDs will be in the nature of subordinated debt and hence the claims of the holders thereof will be subordinated to the claims of other secured and other unsecured creditors of our Company. Further, since no charge upon the assets of our Company would be created in connection with the NCDs, in the event of default in connection therewith, the holders of NCDs may not be able to recover their principal amount and/or the interest accrued therein in a timely manner, for the entire value of the NCDs held by them or at all. Accordingly, in such a case, the holders of NCDs may lose all or a part of their investment therein. Further, the payment of interest and the repayment of the principal amount in connection with the NCDs would be subject to the requirements of RBI, which may also require our Company to obtain a prior approval from the RBI in certain circumstances."

(Risk factors, item no 12 in the offer document)


A quick reading makes me very uncomfortable. If the company faces trouble at the point of contractual repayment, I am at the tail end of the queue. Does the above statement mean that even if there is a contractual date, regulatory approval is needed for repayment? This is very confusing and I have no idea about where I would stand, in case I invest.

Now I am curious. Either the interest rate scenario is very bleak or this company can use the money brilliantly well and earn enough returns on it to service interest and repay principal.

My first impression was that this debt has been issued by India Infoline, and the company is into stock broking and distribution of mutual funds, insurance, lending, etc. I find that this issuer is not the same as the listed entity. It is only that brand image has been created to build the same identity. This issuer is a NBFC (non-banking finance company), owned almost entirely by the listed entity. And in turn the issuing company has two subsidiaries-one engaged in housing finance and the other, in mutual funds, insurance, etc.

The issuing company lends money in the form of gold loans, loans against shares, etc.  

I was sure that to pay this coupon rate of 12.75% and to cover the costs, and also give a return to the shareholders, the company has to lend aggressively and also recover what it lends. I am not very keen to know about the 'provisioning' that a company does, since it is subjective. I firmly believe that no one speaks the truth.

As the next step, I wanted to see what the shareholders were making, after paying all the lenders their dues and covering all the costs of running this money lending business.  Logically, for any business to survive, the business should give a return on shareholder funds that is higher than the cost of borrowing. If not, there would be gradual erosion of shareholders' money.

So, I took the first step. This is what I see:


 

The numbers set my alarm bells ringing. For five years, the shareholders have got returns that have ranged from two to seven percent per annum! Won’t the shareholders be better off investing the money elsewhere?
 

The NBFC industry is tightly regulated and capriciousness is a hallmark of the policy. So, the industry is vulnerable to the whims and fancies of the regulators. One of the businesses of this company is “gold loans” and the RBI recently changed the rules.  One subsidiary is in distribution of mutual funds and insurance, where there are huge shifts keep happening.
 

I also fail to understand the issue size. They say Rs250 crore, with a “green shoe” of Rs250 crore. Wonder what the company actually needs now? If they need only Rs250 crore, why raise Rs500 crore? Till they deploy the money, they will presumably earn far lower than what they will pay the debenture holder. Unless they have lined up huge borrowing clients and the entire Rs500 crore can be disbursed in double quick time. 
 

Given the dismal return on shareholder money, I am surprised at the credit rating. Surely, standards have fallen. How can a company that gives its shareholders a return less than a bank deposit, enjoy a high safety rating? Do they know something that we do not? The rating rationale of CRISIL talks about the strength of the group and its market position without giving any comments on the business outlook or specifics about the issuer. It looked like they have banked on the parent company’s strength to give this rating. What if the issuing company ceases to be a subsidiary? Is there any guarantee from the parent company for repayment?
 

Issues of NBFCs are getting more and more opaque. The investor does not know which entity is borrowing and is not given any time to analyse or reason out. A high decibel marketing campaign combined with a dozen or so bankers associated with it, will bamboozle investors in to coughing up money.
 

With so many doubts in my mind, I will not put money in the issue, though the coupon rate looks attractive. It takes me back to the wisdom of staying away from anything that looks too good to be true.
 

(The author can be contacted at [email protected].)

 

User

COMMENTS

Apoorva Raval

3 years ago

Well as far as it pays you regular interest and it trade above your purchase price I Don't see any problem in this issue...

REPLY

sachchidanand

In Reply to Apoorva Raval 3 years ago

PROBLEM IS WITH RETURN OF PRINCIPAL AMOUNT ON MATURITY. NORMALLY SUCH DEBENTURES ARE REDEEMED BY ISSUING FRESH DEBENTURES , JUST LIKE MLM . IF THE COMPANY IS UNABLE TO MAKE FRESH ISSUE OF DEBENTURES, FOR REASON OF DETERIORATION IN THE QUALITY OF ISSUER, THEN THE PROBLEM DO ARISE ON REDEMPTION

sachchidanand

3 years ago

i agree that it is better to be cautious than sorry

Apoorva Raval

4 years ago

I had applied for 2lac for monthly option and had got full allotment, what shall I do now..? Shall I sell or hold

c d kajrolkar

4 years ago

Some people also warned at the time of Reliance Power IPO. But the mood of the people was so bullish at that time that nobody paid any heed to them. But this time, we should not repeat the past mistakes.

SUNIL KUMAR HEMNANI

4 years ago

IndiaInfoline is merely taking advantage of all the rules at its disposal . I guess as a reader of Moneylife we have the advantage of making an informed choice . Just the fact that a company in 5 years has not been able to even to reasonably well while our economy was performing well. This is enough for me to know a little bit of rough weather is going to be a bit too much for this company. I am amazed at why a person like Nirmal Jain would want to create such a messy situation .The technicalities make it obvious any problem with the company ,you are not going to see your money.

REPLY

NAYAN

In Reply to SUNIL KUMAR HEMNANI 4 years ago

You are very much right. But I am confident about full subscription of this issue of public.

The interest rate they are offering is not a small carrot.


sachchidanand

4 years ago

I happen to have dealt with IIFL in the past and it was in connection with a dispute with one of my friends, whose trading account was mis used to put through unauthorised transactions , leading to heavy losses being booked in my friend's account. IIFL is reported to have "settled" the matter , without any loss to my friend.
This is just an illustration of how IIFL operates.
As to this NCD Issue, I blame SEBI for allowing the Subordinated Debt issue , under the garb of NCD . Given the illiteracy of Investors in India, IIFL will succeed in collecting even Rs. 1000 crores . My moot question is : What is RBI doing to stop this highway robbery ?

Gaurav Parikh

4 years ago

Interesting that the Consolidated Networth of the NCD Issuer,India Infoline Finance and it's two subs is just Rs 144 crs at March 31,2012 and it is raising Rs 250 crs + Rs 250 crs Greenshoe Option ! ~ Financing Companies do have a higher Debt Equity as they leverage on Networth and scale up operations living of the Interest Spread ~ Problem is that I dont see any EVA or Economic Value Added given such a poor ROE ~ and this NCD is an unsecured Debt ~ Clearly other routes of raising finance are currently blocked~ it's like you got to have personal faith in Nirmal Jain to give him this private loan !

REPLY

sachchidanand

In Reply to Gaurav Parikh 4 years ago

Remember CRB Case ? Mr. C R Bhansali took investors for a ride. He also had good reputation. He floated similar ventures Like Nirmal jain. Remember Sun earth Ceramics & Roofit Industries ? The promoters are absconding till date.

Gaurav Parikh

In Reply to sachchidanand 4 years ago

I'm not certifying Nirmal Jain and IIFL but i think you're getting carried away in comparisons with some really unscrupulous promoters in the past ~ this is a legit 'raising of finance' exercise and you have a choice not to invest in the IIFL Group NCDs given your personal experiences with the practices of this group ~ But I do agree with you that India has a long way to go before we reach an acceptable level of financial literacy where Investors can make wise decisions~in the meantime Investment and Merchant Bankers will continue their aggressive marketing hype to create successful issues ~ remember the levels of oversubscription in the Reliance Power Issue and the subsequent collapse on listing !~ these wolves run in a pack!

sachchidanand

In Reply to Gaurav Parikh 4 years ago

I do agree with you that I have a choice. But how many Investors have such a choice ?They are mis-led and mis-sold such products by Merchant Bankers & Brokers.

NAYAN

4 years ago

What is the procedure of SEBI of approving such issues?

it is the highest level fault of regulators to approve such issues.

REPLY

sachchidanand

In Reply to NAYAN 4 years ago

It is well known how SEBI works. Will SEBI explain Due Diligence compliance by BRLM's ? I suspect this has been manipulated .

PPM

4 years ago

Thank you for the wonderful article.

- Without RBI approval, can they issue NCD in the market?

- If they do not need RBI approval to issue the NCDs, why do they need to get RBI approval in repayment?

- IIFL itself is not having any market standing but their subsidiary can get AA- rating from ICRA and CRISIL..shame.

- In India, rating of Financial Instruments is a farce

End of the day, what can be expected of agencies like SEBI whose officers collude with the crooks.

REPLY

sachchidanand

In Reply to PPM 4 years ago

Credit Rating itself is a suspect business in India. SEBI's compulsion to obtain Credit rating / Issue rating is nothing but to create revenue stream for Credit rating agencies. All of them- ICRA ,Even CRISIL is having bad history in IPO rating. Better to do away with them as they are no hope for Investors

dhawanbm

4 years ago

The review of the company brings out the revenue deficit it is going to face in times to come, for certain it would trade below offer price and i am not sure if they would pay back! Thanks for the article Mr Balakrishnan.

sivaraman anant narayan

4 years ago

Wish this article had appeared two days earlier!

REPLY

NAYAN

In Reply to sivaraman anant narayan 4 years ago

That is why sir, We need strong mutual fund industry. Had you invested in some bond fund or income fund, you might be enjoying some proportion of such junk bonds for higher rate of return while its proportion to whole of your debt portfolio would be much less.

So, risk will be highly divided. There are tax benefit also. Find good mutual fund advisor in your city or if you are in Ahmedabad you can contact me.

R Balakrishnan

In Reply to sivaraman anant narayan 4 years ago

Why? The issue opens only today and closes on 18th or so

sivaraman anant narayan

In Reply to R Balakrishnan 4 years ago

Already applied and then read the article yesterday.

R Balakrishnan

In Reply to sivaraman anant narayan 4 years ago

You can withdraw if you wish to. Till the allotment is done

NAYAN

In Reply to sivaraman anant narayan 4 years ago

Have you withdrawan the application as per the advice of Mr. R. Balakrishnan?

Naveen Fernandes

4 years ago

As always, Mr. Balakrishnan is very clear in his analysis. I will follow his lead and keep my pennies in the pocket

REPLY

NAYAN

In Reply to Naveen Fernandes 4 years ago

Go, for any good bond or income fund with the help of good Mutual Fund Advisor.

Ramesh Poapt

4 years ago

will someone from ML analyse Shri Ram city union NCDs please? is it a better choice?

Jayant

4 years ago

Excellent analysis Mr. Balakrishnan. Very helpful.

c srinivas

4 years ago

is muthoot's secured NCD safe?

SEBI officially admits to its manager’s involvement in the Pyramid Saimira case

It required a parliament question by MP Rajeev Chandrashekar for SEBI to admit the involvement of its manager Jerome K Alexander in the infamous “forged letter” sent to Pyramid Saimira by SEBI. While Pyramid Saimira is being wound up, why is the regulator dragging its feet over the Alexander case and his links with Nirmal Kotecha?

 
In November 2011, when RK Padmanabhan took over as chief vigilance officer (CVO) at the Securities & Exchange Board of India (SEBI), he stirred things up with an internal warning memo about how he was "receiving complaints" about officers helping to "get certain cases settled" through "consultants and advocates". How come then is he dragging his feet over the involvement of Jerome K Alexander, the manager responsible for sending a 'forged' letter to Pyramid Saimira? Why did it require a parliament question to extract information about Jerome Alexander-which Moneylife alone has been reporting? And how come the involvement of a consultant as collection officer led to the arrest of deputy manager Avarjeet under this watch?
 
Moneylife is the only media to have repeatedly pointed out that the forged letter, which was leaked to several newspapers by stock market manipulator Nirmal Kotecha (including DNA and Business Standard) was the handiwork of a SEBI official. SEBI, which had conducted a searching investigation into the 'leak' of the forged letter, had however kept a tight lid on the involvement of its official. The reply to parliament, also clarified the exact name and designation of the official. Based on information from sources, we had wrongly reported the name as J D'Souza. At that time, we had tried to have the name verified by the executive director in charge but she would not confirm the name. Please see: Pyramid Saimira: Finger points to SEBI Manager in forged letter case or Forgery by SEBI Insider or Consent Orders: Compromised or SEBI is Repeatedly Refused Access to Phone Data … and SEBI: Time for Introspection 
 
The media finally woke up when Rajya Sabha MP Rajeev Chandrasekhar asked the finance ministry for an answer. SEBI was then forced to reveal that an assistant general manager, Jerome K Alexander is under investigation "relating to his alleged involvement in the issuance of a 'forged letter' to Pyramid Saimira" and has been placed under suspension from 15th April 2011. 
 
Strangely enough, in response to a question in parliament, minister of state for finance, Namonarain Meena said that the investigation has still not been concluded by the chief vigilance officer of SEBI. This is strange, because SEBI tracked to Mr Alexander through a mobile phone given to him by Mr Kotecha. Moneylife had checked with Mr Kotecha about his link to Mr Alexander and he did not deny it either. What is more interesting is that SEBI has been lobbying furiously for the power to tap phone and demand information from phone companies. If the regulator cannot act against its own, when caught in a flagrant act of corrupt collusion with a market operator, can we trust it to act impartially when it has the power to tap phones at will? Let's not forget, that SEBI has been recently pulled up by the Securities Appellate Tribunal (SAT) for dragging an investigation for 12 long years. This too is a case that cries for a detailed investigation by SEBI CVO. 
 
But let's go back to Jerome Alexander and the Pyramid Saimira for a moment. This a curious investigation which started with a bang, with excellent work by Dr Pradnya Sarvade, an IPS officer who had taken over as head of SEBI's investigation. It dates back to December 2008, when PS Saminathan, chairman of Pyramid Saimira received a letter from SEBI asking him to make an open offer for 20% of the floating stock at not less than Rs250 a share within 14 days while the ruling market price was only Rs 70 then. This followed Mr Saminthan's decision to acquire 25% stake held by two co-promoters, one of whom being Nirmal Kotecha, a stockbroker. But the investigation quickly fizzled off and turned lop sided to the point where Pyramid Saimira, a profitable, listed company is being liquidated (rather than forcing a change in management) thereby causing losses to tens of thousand shareholders and employees. On the other hand, Nirmal Kotecha, a notorious speculator and a self-confessed admirer the late scamster Harshad Mehta, is still scot free, while the involvement of its own officials has been kept suppressed until today. 
 
The other two cases that the minister mentions in his reply to the parliament question is that of Rajesh Pratap Singh, another assistant general manager at Kolkata, who was caught by the Central Bureau of Investigation (CBI) accepting a bribe. According to the minister, two cases have been registered against him-for possession of disproportionate assets and for accepting a bribe. 
 
Mr Chandrashekhar's question to the ministry of finance, based on Moneylife reports was simple: "Whether any investigations have been conducted into the allegations of irregularity, bribery and corruption by the staff" at SEBI. Minister of state for finance Namo Narian Meena responded by giving three examples (Click here to read the PDF document)
 
The more recent case is the one involving Avarjeet Singh, a deputy general manager, who was also caught by the CBI for accepting a bribe and is now on bail (Bribery: SEBI must show good governance). Here too, we had learnt that the CBI may broaden investigation to nearly a score of entities that were part of the same investigation and order, where Mr Singh had demanded a bribe. 

 

 

User

COMMENTS

Vaibhav Dhoka

4 years ago

It was never well at SEBI's intermediary department which has become den of corruption.They are not anwserable as seniors are loaded with their own internal problems.They are like Talathis and Havaldar in revenue and police department.They behave like them.

Pradeep R Hattangadi

4 years ago

See Everything But Ignore - SEBI

sun

4 years ago

i got lot to say about the malpractice in the sebi. my cases still pending with the SEBI. well known [former WTM Mr Abraham and Mr MS Sahoo handled my cases and i have personally given lot of evidences to prove against the fraud has been committed by one brokerages along with the country's biggest depository. but nothing had been taken by the SEBI top officials even at this point of time. i am now processing these through the Court of law since the SEBI has totally proved ineffective with reference to the "investors protection"

Jayant

4 years ago

Once again I ask the question. Who is watching the 'watchdog'. At present SEBI seems only interested in regulating Mutual Fund distributors. I wish they would rather concentrate on getting their own house in order.

REPLY

nagesh kini

In Reply to Jayant 4 years ago

This so-called watch dog can neither bark nor bite - it is toothless and high time replaced with a better breed.

ICICI Bank to hike overseas ATM cash withdrawal fee by 17%

“With effect from 15 September 2012 ATM cash withdrawal fee at international location will be...

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