Muthoot Finance Limited

NCD Issue Series II December 21, 2011

Muthoot Finance Limited, one of the largest gold financing companies in India in terms of loan portfolio (according to IMaCS Research), has come up with its second public issue of secured, redeemable Non Convertible Debentures (NCDs) aggregating upto Rs. 300 crore with an option to retain over-subscription upto Rs. 300 crore for issuance of additional NCDs aggregating to a total of upto Rs. 600 crore. The NCD Issue will open for subscription on December 22, 2011 and close on January 07, 2012. Rating agencies -Crisil and ICRA have given AA-/Stable rating for the NCDs. The company will pay high interest rates of ranging between 13.00% and 13.43% p.a. on these bonds. Investors need to apply at the earliest as allotment is to be made on first come first serve basis. Investors can also look at NCDs that are listed already on the exchanges. A table of such NCDs along with their credit rating and YTMs is pasted below in this note. Objects of the Issue: The funds raised through this Issue will be utilized for the companys various financing activities including lending and investments, to repay its existing liabilities or loans and towards its business operations including for the capital expenditure and working capital requirements, after meeting the expenditures of and related to the Issue and subject to applicable statutory/regulatory requirements. Issue Terms:
Issuer Issue Stock Exchanges proposed for listing Issuance and Trading Trading Lot Depositories Rating Pay-in date Muthoot Finance Limited Public Issue by the Company of NCDs aggregating upto Rs. 300 crore with an option to retain oversubscription upto Rs. 300 crore for issuance of additional NCDs aggregating to a total of upto Rs. 600 crore. BSE Compulsorily in dematerialised form 1 (one) NCD NSDL and CDSL CRISIL AA-/Stable by CRISIL and [ICRA] AA-(stable) by ICRA (for an amount of upto Rs. 600 crore). 3 (Three) Business Days from the date of reciept of application or the date of realisation of the cheques/demand drafts, whichever is later

Issue Details:
Options Frequency of Interest Payment Minimum Application In Multiples of Face Value of NCDs Tenor Redemption amount (per NCD) Coupon Rate (%) for NCD Holders for all Categories Effective Yield (per annum) for NCD Holders for all Categories Mode of payment I II III IV

Annual Annual Annual NA Rs. 5,000 (5 NCDs) (for all options of NCDs, namely Options I, II, III, and IV either taken individually or collectively) Rs. 1,000 (1 NCD) Rs. 1,000 24 months 36 months 60 months 66 months Face Value + interest amount Rs. 2,000 13.00% 13.00% 13.25% 13.25% 13.25% 13.25% NA 13.43%

NECS, NEFT, RTGS, Direct Credit and Registered Post/Speed Post.

Who can apply? Category I

Public Financial Institutions, Statutory Corporations, Commercial Banks, Co-operative Banks and Regional Rural Banks, which are authorised to invest in the NCDs; Provident Funds, Pension Funds, Superannuation Funds and Gratuity Funds, which are authorised to invest in the NCDs; Venture Capital funds registered with SEBI; Insurance Companies registered with the IRDA; National Investment Fund; and Mutual Funds.

Category II

Companies, Bodies Corporate and Societies registered under the applicable laws in India and authorised to invest in NCDs; Public/Private Charitable/Religious Trusts which are authorised to invest in the NCDs; Scientific and/or Industrial Research Organisations, which are authorised to invest in the NCDs; Partnership Firms in the name of the partner; and Limited liability partnerships formed and registered under the provisions of the Limited Liability Partnership Act, 2008 (No. 6 of 2009). Resident Indian individuals and Hindu Undivided Families through the Karta applying for NCDs aggregating to a value exceeding Rs. 500,000, across all series of NCDs, (Option I and/or Option II and/or Option III).

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Category III

Resident Indian individuals and Hindu Undivided Families through the Karta applying for NCDs aggregating to a value not more than Rs. 500,000, across all series of NCDs, (Option I and/or Option II and/or Option III).

Basis of Allotment:

During the Issue Period, for each category, all applications received on the same day by the Bankers to the Issue would be treated at par with each other. Applicants will be allocated NCDs on first come first serve basis (determined on the basis of date of receipt of each application duly acknowledged by the Bankers to the Issue). All applications in a particular category shall be clubbed together.
Category I 20% of the Issue Size Category II 40% of the Issue Size Category III 40% of the Issue Size

Applicants belonging to all three Categories will be allocated as given in the table below:
Particulars Reservation for each Portion

Credit Rating: The NCDs proposed to be issued under this Issue have been rated CRISIL AA-/Stable by CRISIL for an amount of upto Rs. 6,000.00 million vide its letter dated November 29, 2011, and [ICRA] AA-/Stable by ICRA for an amount of upto Rs. 6,000.00 million vide its letter dated November 29, 2011 The rating of the NCDs by CRISIL indicates a high degree of safety with regard to timely servicing of financial obligations on the NCDs and such instruments carry a very low credit risk. The rating of NCDs by ICRA indicates high degree of safety regarding timely servicing of financial obligations and such instruments carry very low credit risk. FAQs on credit Rating:
Q: Does the minus sign in a rating symbol have negative connotations relating to the issuer's performance or its debt-servicing capability? A: Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations whatsoever. However an issue with a rating carrying a negative symbol is mildly inferior in terms of credit rating compared to another issue with similar rating without the negative sign. Q: What do the various credit rating symbols mean? A: Rating agencies use simple alphanumeric symbols to convey credit ratings. For example, CRISIL assigns credit ratings to debt obligations on three basic scales: the long-term scale, the short-term scale, and the fixed deposit scale. To illustrate, CRISIL's long-term credit rating scale and the description associated with each category on the rating scale is given below. Symbol (Rating category) AAA AA A BBB BB B C D Description (with regard to the likelihood of meeting the debt obligations on time) Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety High Risk Substantial Risk Default

Security: The principal amount of the NCDs to be issued together with all interest due on the NCDs, as well as all costs, charges, all fees, remuneration of Debenture Trustee and expenses payable in respect thereof shall be secured by way of First pari passu charge on the identified immovable property and a first pari passu charge on current assets, book debts, loans and advances, and receivables including gold loan receivables, both present and future of the Company. The Company will maintain security in favour of the Debenture Trustee for the NCD holders on the assets to ensure 100% security cover of the amount outstanding in respect of NCDs at any time. Payment of Interest: Payment of interest on the Bonds will be made to those Bondholders of the Bonds, whose name appears first in the Register of Bondholders maintained by the Depositories and/or the Company and/or the Registrar, as the case may be as, on the Record Date. The Record Date for payment of interest in connection with the NCDs or repayment of principal in connection therewith shall be 15 (fifteen) days prior to the date on which interest is due and payable, and/or the date of redemption. Liquidity and Exit Options:

Secondary market exit Listing on the BSE to provide tradability.

Interest on Application Money:

On Allotment 8.00% p.a. On Refund 8.00% p.a. 2

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Loan against NCDs: The Company, at its sole discretion, subject to applicable statutory and/or regulatory requirements, may consider granting of a loan facility to the holders of Bonds against the security of such Bonds.

Company Background:
Muthoot Finance Limited, an NBFC, was established in 1997 as a private limited company and reconstituted as a public limited company in November 2008. The company is in the business of financing against gold jewellery; the promoters family has been in this business for almost seven decades. This is the flagship company of The Muthoot Group-A Muthoot M George Enterprise, which is also into hospitality, healthcare, media, education, information technology, foreign exchange, insurance distribution, and money transfer services. Muthoot Finances specialised end-to-end credit processes, from appraisal to disbursement, the experience of the promoters in the business of financing against gold jewellery, the companys strong brand image, particularly in South India, and wide network have enabled the company to significantly scale up its operations between 2006-07 and 2010-11. The companys retail loan assets under management (AUM) increased to Rs.158.68 billion as on March 31, 2011 from Rs.74.38 billion as on March 31, 2010 (Rs.33.69 billion as on March 31, 2009). As per the audited financial statements, as of September 30, 2011, the company held cash balance of Rs. 1,134.5 million and gold jewellery of 129.5 tons. As on September 30, 2011 the companys credit portfolio was Rs. 20,940 crore out of which 99% was in the form of loans against gold and the balance in loans against Non Convertible Debentures issued by the company. Muthoot Finance had a network of around 3,274 branches as of September 30, 2011; steady expansion of branches, particularly in northern and western India, will enable the company to improve its competitive position in the business of financing against gold. The company employs around 21,543 persons in its operations. Asset Quality: Muthoot Finance has maintained a strong and stable asset quality over the past few years. The gross non-performing asset (NPA) ratio in MFLs gold loan financing portfolio was low at 0.29 percent as on March 31, 2011, compared with 0.46 per cent a year ago. It was 0.59 per cent as on September 30, 2011. Besides, strong credit underwriting norms, marked by a conservative loan to value (LTV) ratio of around 70 per cent, enable MFL to maintain consistently high level of asset quality. MFL has a healthy earnings profile, supported by its high interest spreads and low credit costs. MFLs net profitability margin (NPM), based on quarterly average, was 5.5 per cent in 2010-11, as against 5.1 per cent in the previous year. MFLs operations continue to be mainly confined to financing against gold/gold ornaments; this business accounted for around 99 per cent of the companys overall revenues in 2010-11. Competitive Strengths:

Market leading position in the Gold Loan business with a strong presence in under-served rural and semiurban markets. Strong brand name, track record, management expertise and Promoter support. High-quality customer service and short response time. Strong capital raising ability. In-house training capabilities to meet the branch expansion requirements.

Strategy:

Expand branch network and visibility to maintain its market leadership position. Target new customer segments. Access low-cost and diversified sources of funds. Strengthen its operating processes and risk management systems.

Risks and Concerns:

Requirement of substantial capital hence any disruption in funding sources would have a material adverse effect on liquidity and financial condition of the company. The companys financial performance is particularly vulnerable to interest rate risk. Ability to recover the full loan amount and the value of the collateral may not be sufficient to cover the outstanding amounts due under defaulted loans. Increasing competition may result in declining margins. A major part of branch network is concentrated in southern India and any disruption or downturn in the economy of the region would adversely affect operations. 3

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The business could be adversely affected if it is not able to control or reduce the level of nonperforming assets. Difficulties in carrying out credit risk analysis on customers, most of whom are individual borrowers. Handling high volume of cash and gold jewellery which are exposed to operational risks, including employee negligence, fraud, petty theft, burglary and embezzlement, which could harm results of operations and financial position. Maintaining the current levels of profitability due to increased costs or reduced spreads. The Promoters, Directors and related entities have interests in a number of entities, which are in similar businesses and this may result in potential conflicts of interest with the company. Changes in interest rate may affect the price of NCDs. Gold price decline could lead to lower margin of safety in case of defaults. The Supreme Court is yet to give its verdict on applicability of The Kerala Money Lenders Act, 1958, for non-banking financial companies (NBFCs); an unfavourable verdict could not only adversely affect MFLs lending rates but also increase its operational expenditure, given the requirements (under the said Act) of registering all establishments with state authorities and complying with state regulations.

Financials: Muthoot Finance has a healthy earnings profile, supported by its high interest spreads and low credit costs. The company reported a profit after tax (PAT) of Rs.4.9 billion for 2010-11, against Rs.2.3 billion for 2009-10. For 2010-11, MFLs net profitability margin (NPM; based on quarterly average) was 5.5 per cent. For the half year ended September 30, 2011, MFL reported PAT of Rs.4.06 billion on a total income of Rs.20.25 billion, compared to Rs.1.99 billion of PAT and Rs.9.12 billion of total income for the corresponding period of the previous year. MFLs NPM is expected to remain comfortable at around 4 per cent over the medium term as the company is likely to pass on most of the increase in its cost of borrowing to its customers. The total capital in relation to managed assets of the company was 16.31 % (Tier 1 capital of 12.05%).
Particulars Gross Retail Loan assets under management (Rs. In million) Gross NPAs (Rs. In million) Net NPAs (Rs. In million) Capital Adequacy Ratio (%) Net NPAs/Net Retail loans (%) As of Sep 30, 2011 2,09,404.93 1,233.2 1,058.9 18.24% 0.58% 31-Mar-11 1,58,684.55 460.1 390.5 15.82% 0.33% 31-Mar-10 74,381.48 343.6 306.4 14.79% 0.56% 31-Mar-09 33,690.08 161.1 145.0 16.30% 0.57% 31-Mar-08 22,262.80 92.6 83.3 12.56% 0.46%

Capital Adequacy: With effect from April 1, 2010, RBI has increased the minimum capital adequacy ratio to 12.0% and to 15.0% from March 31, 2011. Muthoot Finance maintains a capital adequacy ratio above the minimum levels prescribed by the RBI and had a capital adequacy ratio of 12.56%, 16.30% 14.79%, and 15.82% as of March 31, 2008, 2009, 2010, and 2011 respectively. The capital adequacy ratio was 18.24% as of September 30, 2011, with Tier I capital comprising 13.48%. Balance Sheet:
Particulars Fixed Assets Investments Deferred Tax Assets, (Net) Current Assets, Loans and Advances Total Secured Loans Unsecured Loans Current Liabilities Provisions Net worth Total As at Sep 30, 2011 2,624.85 75.05 5.06 2,04,508.15 2,07,213.11 1,34,849.95 37,717.95 5,842.72 2,682.22 26,120.27 2,07,213.11 As at March 31, 2011 2,340.84 75.05 -24.73 137,246.32 139,637.48 102,111.55 17,274.31 3,878.71 3,031.00 13,341.92 139,637.48
(Rs. in millions, unless otherwise stated)

As at March 31, 2010 1,532.71 75.05 -24.84 62,818.49 64,401.41 45,471.22 7,334.03 4,524.35 1,229.90 5,841.92 64,401.41

As at March 31, 2009 1,293.10 85.31 -37.87 36,259.89 37,600.43 30,087.45 1,568.48 1,805.57 524.46 3,614.47 37,600.43

Profit and Loss Account:

Particulars Total Income Total Expenditure Net Profit before Tax Net Profit As at Sep 30, 2011 20,245.44 14,162.99 6,082.44 4,060.06 As at March 31, 2011 23,158.68 15,546.57 7,612.11 4,941.76

(Rs. in millions, unless otherwise stated)

As at March 31, 2010 10,893.80 7,438.27 3,455.53 2,275.75

As at March 31, 2009 6,204.02 4,722.32 1,481.70 977.20

Debt to equity ratio: The debt to equity ratio prior to this Issue is based on a total outstanding debt of Rs. 172,567.90 million and shareholder funds amounting to Rs. 26,120.26 million as on September 30, 2011. The debt equity ratio post the Issue, (assuming subscription of NCDs aggregating to Rs. 6,000 million) would be 6.61 times, based on a total outstanding debt of Rs. 178,567.90 million and shareholders funds of Rs. 26,120.26 million as on September 30, 2011. 4

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NCDs which are available currently for trading in the secondary market (on NSE and BSE):
Issuer Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co Shriram Transport Finance Co L&T Finance L&T Finance L&T Finance L&T Finance L&T Finance L&T Finance TATA Capital TATA Capital TATA Capital TATA Capital SBI SBI SBI SBI SBI SBI India Infoline Investment Serv India Infoline Investment Serv India Infoline Investment Serv India Infoline Investment Serv Shriram City Union Finance Shriram City Union Finance Shriram City Union Finance Shriram City Union Finance Shriram City Union Finance Shriram City Union Finance Muthoot Finance Muthoot Finance Muthoot Finance Muthoot Finance Muthoot Finance Muthoot Finance Manappuram Finance Manappuram Finance Manappuram Finance Religare Finvest Limited Religare Finvest Limited Religare Finvest Limited Religare Finvest Limited Religare Finvest Limited Religare Finvest Limited
Note: YTM is yield to maturity - Yield that would be realized on a bond if the bond was held until the maturity date. Credit Rating (as per latest data): For STFC NCDs CARE AA+ / Crisil AA (Stable). For TATA Cap NCDs CARE AA+ / ICRA LAA+. For L&T Fin NCDs CARE AA+ / ICRA LAA+. For SBI Bonds CARE AAA / AAA/ Stable by CRISIL. For IndiaInfoline NCDs - CARE AA-' by CARE & ICRA AA- by ICRA. For SHRIRAMCITI NCDs - Crisil AA-/Stable Care AA'. For Muthoot NCDs - CRISIL AA-/Stable by CRISIL and [ICRA] AA-(stable) by ICRA. For Manappuram NCDs - CARE AA- from CARE and BWR AA- from Brickwork. For Religare Finvest NCDs - [ICRA] AA (Stable) from ICRA Ltd. & [CARE] AA- from CARE. Religare and Manappuram NCDs are listed only on BSE, while the rest are listed on NSE and (in some cases) also BSE.

Series N1 N2 N3 N4 N5 N6 N7 N8 N9 NA NB NC ND NE NF NG NH NI NJ NK NL NM NN NO NP NQ N1 N2 N3 N4 N5 N6 N1 N2 N3 N4 N1 N2 N3 N4 N5 N6 N1 N2 N3 N4 N1 N2 N3 N4 N5 N6 N1 N2 N3 N4 N5 N6 MFLNCD1 MFLNCD2 MFLNCD3 O1C1 O1C2 O1C3 O2C1 O2C2 O2C3

Coupon Rate 11.00% 11.25% 11.03% 11.00% 10.75% 9.75% 9.50% 9.00% 10.25% 10.00% 9.50% 10.50% 10.25% 9.75% 11.00% 10.75% 10.25% 11.60% 11.35% 11.10% 11.35% 11.10% 11.00% 9.51% 9.62% 9.95% 10.24% 8.40% 8.50% 11.00% 11.25% 12.00% 12.00% 9.25% 9.50% 9.75% 9.30% 9.95% 9.45% 11.70% 11.70% 11.70% 11.90% 11.60% 11.85% 12.10% 11.50% 11.60% 11.85% 11.75% 12.00% 12.00% 12.25% 12.00% 12.25% 12.00% 12.20% 12.10% 12.25% 12.50% 12.00% 12.15% 12.25%

Residual Maturity (Year) 2.69 2.69 2.69 2.69 0.69 3.45 3.45 3.45 5.45 5.45 5.45 3.45 3.45 3.45 4.96 5.20 5.45 5.45 5.45 5.45 4.56 4.56 4.56 2.56 2.56 2.56 2.75 2.75 5.08 7.75 1.22 1.22 2.21 2.21 2.21 2.21 8.88 13.88 9.24 9.24 14.25 14.25 2.66 3.00 4.67 4.67 4.68 4.68 4.68 2.68 2.68 2.68 1.74 1.74 2.74 2.74 4.74 4.74 0.81 1.72 1.72 4.76 4.76 4.76 2.76 2.76 2.76

Credit Rating AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AAA AAA AAA AAA AAA AAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA-

Call / Put Nil Nil End of 48 months End of 48 months Nil End of 36 months End of 36 months End of 36 months End of 60 months End of 60 months End of 60 months Nil Nil Nil Nil Nil Nil Nil Nil Nil End of 48 months End of 48 months End of 48 months Nil Nil Nil Nil Nil Nil Nil Nil Nil End of 36 month End of 42 months End of 36 month End of 36 month End of 5 Yr / Nil End of 10 Yr / Nil End of 5 Yr / Nil End of 5 Yr / Nil End of 10 Yr / Nil End of 10 Yr / Nil Nil Nil Nil Nil End of 48 Months End of 48 Months End of 48 Months Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil

Tenor to Call / Put (Yrs) Nil Nil 1.69 1.69 Nil 1.45 1.45 1.45 3.45 3.45 3.45 Nil Nil Nil Nil Nil Nil Nil Nil Nil 3.56 3.56 3.56 Nil Nil Nil Nil Nil Nil Nil Nil Nil 0.21 0.72 0.21 0.21 3.88 8.88 4.24 4.24 9.25 9.25 Nil Nil Nil Nil 3.69 3.69 3.69 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil

Last traded Price 1010 1055 1250 1032 1070 1010 NA NA 970 NA NA 1007.6 995 NA 1130 1060 NA 1019 NA NA 1061 1000 NA 1010 NA NA 985 1003.6 1227 1040 990 1030 104100 1032 1124.9 1404 10600 10850 10820 NA 11225 10330 1000 1000 975 948 NA 1007 1019 NA 1000 991 NA 1002 NA 988 NA 965 1020 NA 996 NA 997 1010 NA 980 1002

Last traded Date 19-Dec-11 19-Dec-11 19-Dec-11 21-Nov-11 16-Dec-11 15-Dec-11 NA NA 16-Dec-11 NA NA 19-Dec-11 23-Nov-11 NA 19-Dec-11 22-Nov-11 NA 16-Dec-11 NA NA 19-Dec-11 15-Dec-11 NA 19-Dec-11 NA NA 19-Dec-11 19-Dec-11 19-Dec-11 19-Dec-11 19-Dec-11 19-Dec-11 14-Dec-11 19-Dec-11 19-Dec-11 19-Dec-11 19-Dec-11 19-Dec-11 19-Dec-11 NA 19-Dec-11 23-Nov-11 19-Dec-11 19-Dec-11 9-Dec-11 19-Dec-11 NA 12-Dec-11 19-Dec-11 NA 2-Dec-11 19-Dec-11 NA 19-Dec-11 NA 19-Dec-11 NA 19-Dec-11 19-Dec-11 NA 19-Dec-11 NA 14-Dec-11 19-Dec-11 NA 19-Dec-11 19-Dec-11

YTM 11.65% 12.11% 12.38% 12.84% 10.87% 11.75% NA NA 11.75% NA NA 12.80% 12.95% NA 12.10% 12.85% NA 12.40% NA NA 11.21% 12.76% NA 13.16% NA NA 11.14% 10.28% 9.97% 10.02% 10.24% 10.29% 9.42% 10.09% 10.21% 10.63% 9.28% 9.21% 9.42% NA 9.23% 9.85% 13.56% 13.14% 13.62% 14.71% NA 12.78% 12.69% NA 13.37% 14.11% NA 13.90% NA 14.22% NA 14.23% 13.64% NA 15.27% NA 13.15% 13.03% NA 14.34% 13.41%

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FV of NCDs in all cases is Rs.1000, except Rs.10,000 for SBI and Rs. 1,00,000 for TATA Cap N1. Last traded date means date of last trade (not beyond the previous month). Further freak trades are not considered for YTM calculations. YTM for issues with put-call option has been calculated based on assumption that the options may not be exercised and that the issue will run till original maturity date.

Primer: What are NCDs?

Non-convertible Debentures are debt instruments with a fixed tenure issued by companies to raise funds from the market for business purposes. Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company at a future date. Hence, the return offered by them is relatively higher than convertible debentures. The issuing company pays a fixed rate of interest for the pre-defined period. The interest is paid at different time periods, say, quarterly, semi-annually and annually. Some debentures also have cumulative option i.e. interest on them is cumulated and paid on maturity. These debentures can be redeemed after a specified time period so the amount invested, which is equal to the face value, will be returned to the investor. These are the good investment option for people who are looking beyond the fixed deposits and other small savings instruments or for those who want to create a diversified debt portfolio by investing in different instruments. Secured and Non Secured NCDs: Non Convertible Debentures are generally classified as secured and unsecured based on security of invested amount. Secured NCDs are secured by a charge on the assets of the company. The holders of secured debentures have the right to recover their principal amount and the unpaid amount of interest on such debentures out of the assets mortgaged by the company. Unsecured NCDs do not carry any security with regard to the principal amount or unpaid interest. Listing & Liquidity: Debentures can be listed on a stock exchange, providing opportunities to accumulate additionally or to sell them and exit earlier than the tenure of the debenture. But investors have to be careful about the price movement of the instruments, which in turn depends upon the interest rate movements and the applicable coupon interest rate payable on them. Tenure: Redemption periods usually range from 3-15 years. However, put and call options are the added features, which can be exercised after three years in longer tenure bonds. Options: There are embedded options such as Put and Call attached to NCDs. Call Option: A callable bond could be called or redeemed by the issuer before the maturity of the bond. Issuer will call away the bond when the bond was issued in a high interest rate environment and interest rates fall subsequently. Investor will lose the high interest or coupon payments and will be left with redemption proceeds to be invested in a lower interest rate environment. Put Option: A putable bond works in an exactly opposite way where the investor can sell the bond to the issuer at a specified price before the maturity of the bond if the interest rates go up after the issuance and investor has higher yielding investment options available. Callable bonds are preferred by the corporation while investors prefer putable bonds. All things equal, a callable bond would trade at a lower price than the putable bond. Income tax Treatment: For income tax purpose, the NCDs are treated like debt instruments. Interest: The interest earned would be treated as any other interest (say, from a bank FD). It would be a part of your Income from other sources, and would be taxable. No TDS is applicable on debentures if they are listed on stock exchanges and are held in demat form. Principal: An NCD is a capital asset. If you decide to sell the NCDs on the stock exchange, capital gains can also arise. If NCDs are sold with in a period of 12 months from the date of allotment, short term capital gains / loss (STCG) will arise and if you decide to sell NCDs after a period of 12 months, the resulting gain or loss is called long term capital gains / loss (LTCG). While short term capital gains on sale of NCDs would be taxed at normal rates, long term capital gains on sale of NCD (a listed security) are taxed at concessional rates u/s 112 of IT Act. Long term capital gains on listed securities (except equity shares) are taxed at the rate of 10% without indexation or 20% with indexation whichever is lower. Comparison between NCDs and FDs: In volatile conditions and times of extremely uncertain market returns, investors migrate from equity to the more reliable debt instruments. NCDs yield a higher return than most other instruments. A popular company with a good track record will see good investor interest. With a rate of return of over 10%, the NCD is a better option when compared to a fixed deposit. Bank fixed deposits that are safer and more popular give about 8-9% returns. So, for the risk averse, the NCD is an opportunity worth considering.

Comparison between NCDs and FDs:

NCD Liquidity Safety Taxation Interest Rate Risk More Liquidity. As NCDs are listed on a stock exchange, investors can sell them any time they want. NCDs are mostly secured debt No TDS is applicable on debentures held in demat form. In addition to interest income, there can be capital gains if the NCD is sold before maturity. NCDs are exposed to Interest rate Risk FD FD cant be sold in the market. However, bank FDs are also highly liquid and can be encashed before maturity with minor penal charges. Corporate FDs are unsecured and bank FDs are insured to the extent of Rs one lakh only. TDS is applicable. No such risk.

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RETAIL RESEARCH Fax: (022) 30753435 Corporate Office, HDFC Securities Limited, I Think Techno Campus, Bulding B, Alpha, Office Floor 8, Near Kanjurmarg Station Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Fax: (022) 30753435 Website: www.hdfcsec.com Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional Clients Disclaimer: HDFC Bank (a shareholder in HDFC Securities Ltd) is associated with this issue in the capacity of Lead Managers and Bankers to the issue and will earn fees for its services. This report is prepared in the normal course, solely upon information generally available to the public. No representation is made that it is accurate or complete. Notwithstanding that HDFC Bank is acting for Muthoot Finance Limited. This report is not issued with the authority of Muthoot Finance. Readers of this report are advised to take an informed decision on the issue after independent verification and analysis.

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