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

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

R Balakrishnan | 04/09/2012 05:11 PM | 

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


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Apoorva Raval

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...

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sachchidanand 3 years ago in reply to Apoorva Raval


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sachchidanand 3 years ago

i agree that it is better to be cautious than sorry

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Apoorva Raval

Apoorva Raval 3 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

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c d kajrolkar

c d kajrolkar 3 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.

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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.

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NAYAN 3 years ago in reply to SUNIL KUMAR HEMNANI

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.

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