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Muthoot Finance extended NCD issue to 09 April 2012

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Gold loan company Muthoot Finance has recently extended the closing date of its secured redeemable non-convertible debenture (NCD) issue from the earlier March 17 deadline to now April 09.

The issue offers 13%, 13.25%, and 13.43% rate of interest for tenures ranging from two-year to five-and-a-half year. However, this is neither tax-saving nor tax-free (wherein interest income is tax free) investment option. The issue opened on March 2.

The NCD issue on Tuesday just managed to garner Rs 250 crore, which is the core issue size, along with an oversubscription option of another Rs 250 crore. By extending the issue closing date, the company is hoping to mop up Rs 500 crore, according to banking sources.

"The issue was not getting enough response initially," one of the issue arrangers told Moneycontrol.com on condition of anonymity. "In February and March, some tax efficient infra bonds were getting attention from the people who had to invest to save their tax before the financial year ends. However, the bond issue has picked up of late. So far, it has collected around Rs 250 crore. The extension of closing date has worked. Before April 09, it should comfortably reach Rs 500 crore mark," the banker added.

An e-mail sent to George Muthoot Alexander, Managing Director of the company did not elicit any response till the time of writing this article. However, Moneycontrol.com managed to speak with Oommen K Mammen, the CFO of the company.

This is what he said:

"We are focusing on wide range of retail participation in the NCD issue. In the retail category some individuals have showed interest for investment. However, they don't have dematerialized accounts. Our appointed brokers are arranging it for them. It takes some time. Hence, we though of extending the issue closing in the new fiscal year. We are getting good subscription and the issue is going smoothly."

To promote the issue, the company has increased city locations from 100 (in the earlier issue) to 179. Muthoot has earmarked half of the total issue size for retail investors and the rest is for institutional investors, high net worth individuals and non-resident Indians. The face value of each NCD is Rs 1,000 and the minimum application is for five NCDs (Rs. 5,000).

Considering 13.43% coupon size for 5.5 years, the post tax return would be around 12.10% for an investor who comes under 10% tax bracket (annual income upto Rs 5 lakh in a year). Assuming that a bank fixed deposit scheme offers 9%, the same post tax return would around 8.10%.

In the last one year, shares of Muthoot Finance and Manappuram Finance , India's two major gold loan companies dropped nearly 7.50% and 22% respectively as against a fall of around 3% in the 30-share Sensex. The journey for gold loan companies has been fraught with regulatory concerns.

Last year, RBI had removed priority sector status from gold loan companies, which led a higher cost of borrowing for those companies.

Moreover, the Reserve Bank of India (RBI) is likely to step in and keep a check on gold loans disbursed by the banks, reports suggest. The regulator may be planning to regulate interest rates on gold loans, penalties and may impose higher margins on loan to value, which in turn, may hurt business prospects of gold loan companies.

"The company in consultation with the lead managers to the issue has decided to revise the issue closing date and extend the issue period upto April 09,2012. The NCD public issue committee of the company by their resolution dated March 16.2012 has given their approval to the extension of the issue closing date for the issue. The issue shall now close on April 09.20l2," Muthoot Finance had said in a release issued on March 16.

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