ECL Finance Limited, one of the finance arms of the Edelweiss Group, is launching its public issue of secured and redeemable non-convertible debentures (NCDs) from today, July 24, 2018. The issue will carry an effective annual rate of 9.85% for 10 years, 9.65% for 5 years and 9.45% for 3 years.
The company aims to raise Rs. 2,000 crore from this issue, including a green-shoe option of Rs. 1,500 crore. The issue is scheduled to close on August 16, but in case of oversubscription, the company will have the option to foreclose it.
So, before we take a decision whether to invest in this issue or not, let us first check its salient features.
Size & Objective of the Issue – Base size of the issue is Rs. 500 crore and total issue size is Rs. 2,000 crore including the green shoe option of Rs. 1,500 crore. 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 – As mentioned above, the company is issuing these NCDs for a period of 3 years, 5 years and 10 years. Moreover, these NCDs will carry coupon rates in the range of 9.25% to 9.85% with monthly, annual and cumulative interest payment options.
There is a floating interest rate option as well, in which the interest rate will be reset on a periodic basis as per MIBOR. The company has decided to offer a spread of 2.50% over MIBOR with this option and the rate will be reset on an annual basis.
Minimum Investment – Investors need to apply for a minimum of 10 NCDs in this issue with face value Rs. 1,000 each i.e. an investment of Rs. 10,000 at least.
Categories of Investors & Allocation Ratio – The investors have been classified in the following four categories and each category will have the below mentioned percentage fixed in the allotment:
Category I – Institutional Investors – 20% of the issue i.e. Rs. 400 crore
Category II – Non-Institutional Investors – 20% of the issue i.e. Rs. 400 crore
Category III – High Net-Worth Individuals (HNIs) – 30% of the issue i.e. Rs. 600 crore
Category IV – Retail Individual Investors (RIIs) – 30% of the issue i.e. Rs. 600 crore
Allotment on First-Come First-Served Basis – Subject to the allocation ratio, 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 – CRISIL and ICRA have rated this issue as ‘AA’ with a ‘Stable’ outlook. Moreover, these NCDs will be ‘Secured’ in nature.
Listing, Premature Withdrawal Option – These NCDs will get 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. As there will be no option of a premature redemption, the investors can always sell these bonds on the stock exchanges.
Demat A/c. Mandatory – Demat account is mandatory to invest in these NCDs as the company is not providing the option to apply for these NCDs in physical or certificate form.
TDS – Though the interest income would be taxable with these bonds, NCDs taken in demat form will not attract any TDS. The investor will have to pay tax on the interest income while filing his/her income tax return. TDS @ 10% will be deducted if these NCDs are held in physical/certificate form and annual interest income is more than Rs. 5,000.
Should you invest in ECL Finance NCDs?
During 2013-14 and 2014-15, ECL Finance came out with three of its NCD issues offering 12.52% p.a. for 60 months, 12.68% p.a. for 70 months and 10.64% p.a. for 60 months. But, those were times of high interest rates and it seems the scenario has changed somehow. Corporate issuers are not offering high rate of interest now and that is a new normal these days.
As none of the issuers in the recent times has offered 9.85% coupon, this issue by far is carrying the highest coupon rate. In March 2018, Edelweiss Retail Finance in its public issue of NCDs offered 9.25% for 10 years, 9% for 5 years and 8.75% for 3 years. So, ECL Finance is offering attractive interest rates relatively.
But, then this issue is rated ‘AA’, lower than all the previous issues of the recent times. Edelweiss Retail Finance issue was also rated ‘AA’ Stable by CRISIL and ICRA. So, the conservative investors, who go by credit ratings of such issues, might prefer to avoid this issue and wait for a higher rated issue. You also need to make a decision whether you want to have a relatively higher rate of interest with a slightly lower credit rating, or just skip it and wait for a better issue.
Investors, who fall in lower tax brackets and are looking for relatively higher interest rates to deploy their investible surplus, can think of investing in this issue. However, even if you decide to invest in this issue, I would advise you to go for a shorter possible duration and monthly interest payment option.