IRB InvIT – IPO Note

What is InvIT ?

InvIT is an acronym for Infrastructure Investment Trust.  This is a new type of financial product in the market place.  The first InvIT to be launched in the market is from IRB Infrastructure Developers, one of the largest road developers in India.  They have number toll road projects across India.

InvIT is a quasi-debt product in the sense that though the returns are not guaranteed it would be very similar to regular recurring income.

IPO Details

Security Name IRB InvIT IPO
Offer Details Offer for sale of 34.76 million Units at 100 – 102 INR /unit.

Minimum investment amount – Rs10 lakhs

Offer Size INR 5,805 to INR 5,921 Crores INR
Offer Period 3 May to 5 May 2017
Yield Projection Between 10-12% as per Investment Manager (IM) projections
Credit Rating CARE AAA(ls): Stable , IND AAA; Outlook Stable

Introduction: The IRB InvIT is the first InvIT to be issued in the Indian markets. IRB Infrastructure Private Limited is the Investment Manager. They have selected six key projects from their existing portfolio distributed over Rajasthan, Gujarat, Maharashtra, Karnataka and Tamil Nadu. These projects have been operational for between 4 to 8 years now with gross revenues of 1000 crores in FY16. Through the InvIT structure IRB seeks to raise capital for these existing projects and in turn promises to distribute the net distributable cash flows (NDCF) to the Investors.

The investment has to be made through the ASBA route.  That is, when you submit the application, the amount would be blocked from your account.  Depending on the quantum of allotment, the actual debit would happen from your account and the block for the rest of the amount would be removed.

Project Financials:  The Investment Manager has projected a turnaround in the financials from a loss of 76 Crore INR in FY16 to a profit of 308 Crore INR by FY20. The main savings come from the reduction in the interest burden since the existing debt will be transferred to the SPV which has a better credit rating (AAA) than the current promoter.

Tax Treatment:  As per the regulations at least 90% of the distributable cash flow of the InvIT should be distributed to the unit holders. Dividends should be paid within 15 days and the distribution should be made on a half yearly basis. The tax treatment for the unit holders is as follows

  • Dividend income distributed by the trust is exempt in the hands of the unit holders
  • Long term capital gains where the units are held for more than 36 months would be tax exempt, while short term capital gains would be taxed at 15%
  • Interest income received directly by the unit holders, if any, would be taxable

In addition the dividend and interest received by the trust from the SPV would also be tax exempt. Overall the tax treatment is favourable for the investors

Key Risks: The two main risks are pricing risks (Toll prices are linked to WPI. Average WPI Inflation over the last 10 years is 5.5%) and operational risks (projected volume in traffic) is not met. In addition there may be political/social risks as in some places in India there has been local unrest/protest over high tolls. This may accelerate over time with the increase in toll.

Our Recommendation: The IRB InvIT has a high quality set of projects with predictability in cash flows. The tax treatment is also favourable for the investors.  With the projected yields in the range of 10%-12%, there would be heavy demand for this.  The allotment ratios are expected to be smaller.  With the current yields on debt instruments moving southwards, there is a big appetite in the market for these high yielding assets.  There is a possibility of higher price at listing and consequently capital gains on listing is possible.

It would be considered as a quasi-debt product with attractive tax arbitrage, as the dividends are exempted from tax.

The large issue size as well the listing on the exchange would provide sufficient liquidity. Our recommendation is for investors who can invest the minimum 10 lakh INR to subscribe to this IPO.

Go ahead and participate in the first InvIT launched in India, if you can set aside Rs10 lakhs!

 

 

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How to benefit from falling interest rates?

Current scenario:

RBI in its recent monetary policy review has talked about reducing repo rates in early 2015 thanks to softening inflation.  Taking cue from the RBI statement, the bonds have rallied over the last 3 days.   The benchmark 10 year GSec has fallen from 8.07% and currently trading at 7.97%. Conversely, we can say the price of the bonds have gone up thereby pushing the yields down.

You would have also read about SBI, ICICI Bank and HDFC Bank reducing deposit interest rates recently. Already, Kotak and IndusInd Bank have reduced the interest rates on their famous high yielding SB accounts.

So what it means to you and me?

It means the interest what you get now on your bank fixed deposits will start moving down.  And hopefully, the interest we pay on our home loan and car loan also starts moving down over time.

Is there a way we can take advantage of the falling interest rates?

Yes, we can by getting in to debt mutual funds, which invests in bonds and debentures.

The characteristic of any bond is that it pays a fixed interest rate for the tenure of the loan irrespective of the prevailing interest rate in the economy.  This is called as coupons.

In a falling interest rate scenario, this leads to increase in the price of the bond.  This is called capital appreciation.

In case of debt mutual fund, which specializes investing in bonds and debentures, they would be able to augment the returns to their investors by adding small doses of capital appreciation to the regular coupons.

Can we not do it with Bank deposits?

No.  Bank fixed deposits are not traded in the market.  Secondly, there is no price appreciation in the bank deposits for investors because there is no market.

What you need to do?

You should consider moving a portion of your bank fixed deposits in to debt mutual funds.

Investors can look at moving in to short term debt funds or accrual based debt funds.  Remember, you should be holding it for at least 3 years to claim preferential tax treatment.

These funds will give you better than fixed deposit returns over the next 3 years with added tax efficiency. 

What are you waiting for?  Reach out to us and we can help you pick the right fund for you.

How to optimize returns on your liquid funds?

We all need to maintain liquid balances in our Savings Bank (SB) accounts for various purposes like paying our EMIs, regular living expenditure, cash withdrawals at ATM etc.  Maintaining balance in SB account is inevitable for all of us.    Though there is great convenience in maintaining sufficient liquidity through SB account, it is not a very lucrative proposition from the investor point of view.

The banks normally pay 4% on SB account balance except for few banks like Kotak, Yes Bank and IndusInd, which pays higher interest of 6% to 7%.

In a recent report released by RBI, the amount of deposits held in Savings Bank account across different banks in India is Rs33 lakhs crores.  Yes, you read it right!!  That’s a humongous amount of money to be left in SB account and allowing banks to benefit out of that.

Let’s try to answer ourselves the question of are we maintaining the optimum balance in SB accounts?

It is worthwhile to note couple of things about the Savings Bank account interest.  The first one is low interest rates compared to bank deposits and to rub salt on the wound, you end up paying tax on your SB account interest.

The SB account interest earned above Rs10,000 per annum is taxable.  For example, you have 4 SB accounts and you earn Rs4,000 each as interest during the year, you would have made a total interest of Rs16,000.  Out of this, Rs10,000 is tax exempt and you have to pay tax at your applicable tax rate for the balance Rs6,000.  If you are in the 30% tax slab, you will pay a tax of Rs1,800 and left with only Rs4,200.  Because of this tax impact, the actual yield you make on SB account is much lower than the 4%, we all think we are making.

So, the important question is:  are we maintaining the optimum balance in our SB accounts?  We can decide the optimum balance by drawing up a monthly budget and retain 2 to 3 months expenses in Savings Bank account.  The rest of the money may be held in much more efficient investment avenue which provides similar kind of liquidity but much higher returns.

Liquid Mutual Funds is the answer:

Liquid Mutual Funds collects money from investors and purchases debt instruments like Treasury Bills, Certificates of Deposits and Commercial Papers, which are issued by Government, Banks and Companies.  The maximum maturity allowed for Liquid funds is 90 days.

The Liquid Mutual Funds provide much better tax efficient returns along with decent liquidity (though not exactly comparable to the liquidity of a SB account).

The credit ratings of these liquid mutual funds are very high and there is close to zero risk in these investments.  These debt instruments would earn interest in sync with the prevailing interest rates in the economy.

Returns made by Liquid Mutual Funds:

Description 1 Year Return 3 Years Return 5 Years Return
Highest Return from a Liquid Mutual Fund 9.80% 10.08% 8.77%
Lowest Return from a Liquid Mutual Fund 7.2% 7.11% 5.73%

As you can see above, the lowest return produced by these Liquid Funds are much higher than the returns what you would have got from your Savings Bank account balance.

Operational Convenience:

Across all the mutual funds, there is no entry or exit load in liquid mutual funds.  That is, you can enter and exit any time.  You may even hold investments in liquid funds on an overnight basis.  The redemption from liquid fund is normally processed in 1 working day and your bank account gets credited on T+1 basis.

The beauty of these liquid mutual funds is you can create/set up, purchase and redeem all your transactions on the web.  There are few mutual funds who also provide you with an option to transact through your mobile phone.  One Mutual Fund (Reliance) even offers an ATM card for your convenience.  Convenience is the cornerstone here and all mutual funds are working to make it smooth and hassle-free for the customer.

Taxation:

I know now everybody is keen to know how the returns from liquid funds are taxed.  There are two options which are available to the investors, being, growth option or dividend option.  Under Dividend option, there is a dividend re-investment option as well.

Since they are part of the debt mutual fund category, the gains you make on liquid mutual funds are taxed as Capital Gains and not as interest income, if held for more than 1 year.

The advantage under Capital Gains taxation is the indexation benefit, which in all practical sense helps to bring down the effective tax rate to less than 5%. Compare that with Savings Bank deposit interest, which is taxed at the highest tax slab of yours.  There is a tremendous tax advantage in respect of liquid funds.

If you opt for dividend option, then the Mutual Fund would deduct the Dividend Distribution Tax (DDT) at 25% before they pass on the funds to your account.

So, the ideal option is to park money for longer tenures and enjoy liquidity as and when required along with lower tax rates.  But if you are going to park money for short term (less than a year), then choose the dividend re-investment option.  

If somebody is holding excess average balance of Rs200,000 in his SB account, he/she is losing more than Rs8,000 per annum, without even realising it.

What are you waiting for?

Review your monthly cash flows and move the excess money in to Liquid Mutual Funds and earn higher tax efficient returns.

Key points to note in this article:

  1.  SB account interest above Rs10,000 is taxable
  2. Liquid Funds are better alternatives to maintaining excess liquidity in Savings Bank account
  3. Liquid funds provide tax efficient returns
  4. If you are going to hold the investment in liquid funds for more than a year, then go for the growth option
  5. If the holding period in liquid fund is less than 1 year, it is advisable to go for dividend re-investment option
  6. Liquid Fund transactions can be done conveniently over the internet, phone etc.,

HDFC Debt Fund for Cancer Cure – a unique debt fund with a social cause

HDFC MF has launched the HDFC Debt Fund for Cancer Cure Series II, an unique debt fund with a social cause.  The fund’s dividends would be directed towards contributions towards Indian Cancer Society.  The fund is available for subscription till 11th March 2014.  This is a unique fund that appeals to the philanthropic objective of individuals, who want to channelize their savings towards a worthy social cause.  

 This fund provides an opportunity to the investors to contribute the dividends from the fund towards Indian Cancer Society, a NGO which provides support to Cancer patients across India.
  • This is a close ended Debt fund for a period of 3 years.
  • The fund has only dividend option.
  • The investor has an option to contribute either 50% or 100% of the dividends towards Indian Cancer Society.
  • The dividends contributed towards Indian Cancer Society is eligible for deduction u/s 80G of the The Indian Income Tax Act
  • HDFC MF will not charge any management or advisory fee on this fund.  The total expense ratio is expected to be around 0.05%
  • HDFC MF would make a matching contribution of all dividends payable
  • The Series I has provided returns of 9.32% over the last 3 years and has declared dividends of Rs10.87 crores
  • At the end of the 3 year tenure, the original investment would be returned along with dividends, if any, to the investor (for those who want to contribute 50% of the dividends)
I strongly urge you to consider investing in this fund, if possible, as it provides an efficient way of channelising your contributions to an established and well run NGO with clear objectives.
About Indian Cancer Society:
ICS is a public charitable trust and an anti-cancer NGO established in 1951.

The rising number of people suffering from cancer in the country and the astronomical treatment cost has made it increasingly difficult to provide quality treatment, especially to the underprivileged. The money raised by the HDFC fund is used for treatment costs of needy and underprivileged patients.

The beneficiaries are identified by an advisory council and are typically patients with an annual income of less than Rs 1 lakh. Hospitals are selected and empanelled with the ICS Cancer fund depending on their medical facilities and sophistication. The Tata Memorial Hospital in Mumbai, Regional Cancer Centre in Trivandrum, the Cancer Institute, Adyar in Chennai, and other hospitals in cities such as Kolkata, Ahmedabad, Srinagar, Vellore and New Delhi are all empanelled to fund treatment of identified patients.

Shriram City Union Finance – NCD Issue – Invest

Overview:
Shriram City Union Finance, a non-banking Finance Company (NBFC) from the Chennai headquartered Shriram Group of Companies is launching a secured Non-Convertible Debenture from 12 Sep 2012.  Shriram City Union Finance plans to collect Rs250 crores with a green-shoe option of another Rs250 crores.

The NCD has a 3 year and 5 year option investment option.  The coupon rate for the 3 year investment is 11.5% and the coupon rate for 5 years is 11.75%.  Please note these rates are applicable only for investments less than Rs5 lakhs under the Reserved Resident Individual Category.  The face value of every NCD is Rs1000 and investors can invest in multiples of Rs1000.

Shriram City Union Finance is an existing profit making company engaged in the business of lending for consumer durables, two-wheelers and small businesses.  The business is concentrated in the four southern states and Maharashtra, which accounts for more than 65% of the branches.  The objective of the issue is to use the proceeds to repay existing loans, expand business and other routine business purposes.  The net interest margins made by Shriram City Union Finance are mouth-watering at more than 7%!

Credit Rating:
One of the important points to note in case of these long term debt instruments is how sound their business is.  This is known through the credit rating assigned by the various credit rating agencies employed by the issuer for this purpose.

The NCD of Shriram City Union Finance has Crisil’s investment grade rating of AA-, which denotes “high degree of safety regarding timely financing of financial obligations“.

Mode of Holding:
Please note, it is mandatory for all the applicants to apply for these NCDs only in the dematerialised form.  That is, you need a Demat account to apply for this issue.  

Investment Alternatives:
While making each and every investment it is very important to analyse what are the available alternatives.  In this case, the available alternatives are bank deposits and already existing NCDs from Shriram and other companies like Tata Capital, which are listed on the Stock Exchanges.

Bank deposits currently don’t offer similar returns for either 3 or 5 year deposits.  The only advantage they would provide is deposit insurance guarantee for a aggregate sum of Rs1 lakh for every investor.

Looking at the other option of existing listed NCDs, there are few NCDs which are available at a little higher yield to maturity, like Tata Capital.  But the biggest problem in India is the lack of liquidity in debt segment of stock exchanges.  The average traded volumes are much lower in the region of Rs30 lakhs per day.  You may get a slightly better yield if you are able to pick up existing NCD’s from the stock exchanges, but for a layman this would be a tough ask.

Taxation:
All returns from NCDs are taxable under the “Income from Other Sources” head as per the Income Tax Act.   Therefore, the effective yields on the NCDs would be less compared to the coupon rate what has been mentioned above, depending on the tax slab you are in.  The issuer, Shriram City Union Finance, would not deduct tax at source (TDS) for the NCDs irrespective of the amount invested.

Investment Recommendation: 
Considering the fact that the deposit rates are moving down and further expected to slide, I believe that this a good opportunity to lock a portion of your fixed income investments at an attractive interest rates. I would suggest that you may use this opportunity and apply for NCDs not exceeding 2% to 5% of your overall portfolio value. (For portfolio sizes which are bigger than Rs30 lakhs).  For others, you may go up to Rs50,000.

As there are no put or call options in this issue, there is no threat of early redemption by the issuer.

Hope you find this information useful and please do let me know if you require any help in applying for this NCD.

Disclaimer:
Please note these are our personal views on this investment and we strongly urge you to check with your Personal Financial Advisor before you decide on investing in this NCDs.   This post is not a solicitation to invest in Shriram City Union Finance NCDs.