Financial Products of Tata Capital Limited Finance Essay

Tata Capital Limited (also referred to as TCL) is a finance company that fulfills the financial needs of retail and institutional customers in India. It was established in 2007 as a wholly owned subsidiary of Tata Sons and is registered with the Reserve Bank of India as a systemically important non-deposit taking non-banking financial company (NBFC).

The company is focused on providing multiple financial services through an extensive network of over 1,000 customer touch-points covering tier I, tier II and tier III cities.

Areas of business [1] 

Tata Capital has financial products and services in the following seven sectors:

Distribution and broking: Third-party investment products, equity and commodity trading for retail and institutional customers.

Retail finance: Passenger and commercial vehicle loans, used car loans, personal loans, home loans, credit cards and consumer durable loans for retail customers.

Commercial finance: Financial products for small and medium enterprises and project finance for capital equipment and infrastructure.

Investment banking: Advisory and debt and equity market products for corporate and small and medium enterprises.

Private equity: Investments in India and other countries.

Wealth management: Suite of advisory and investment offerings for high net worth individuals.

Rural finance: Relevant financial products for rural customers, including financing of farm equipment, agricultural inputs and agricultural enterprises.

Tata Capital also owns around 4 per cent of equity capital of Development Credit Bank, a growing private sector bank.

Tata Capital Limited - Fund Raising - 2009

On Feb 10, 2009, Tata Capital Limited floated its public issue of Non Convertible Debentures (NCD). This is a public issue by the company aggregating Rs. 50,000 Lakhs (or Rs. 500 Crores) with an option to retain oversubscription of Rs. 1,00,000 Lakhs (or Rs.1,000 Crores) for issuance of additional NCDs.

Common Terms of the Issue

The common terms of the NCD issue of Tata Capital were as follows:

Issue

NCDs aggregating Rs. 50,000 lakhs with an option to retain over-subscription of Rs. 1,00,000 lakhs for issuance of additional NCDs.

Stock Exchanges proposed for listing of the NCDs

NSE

Issuance

Demat form only

Trading

Demat mode only

Depository

NSDL and CDSL

Security [2] 

Security will be created for the purposes of this Issue as per the Debenture Trust Deed.

Rating

LAA+ by ICRA and CARE AA+ by CARE

Issue Schedule [3] 

Issue Opening Date: February 2, 2009 and Issue Closing Date: February 24, 2009

Pay-in date

5 days from the date of application

Deemed Date of Allotment

Deemed date of allotment shall be the date of issue of the letter of allotment / regret

Settlement

Please refer to the section titled "Terms of the Issue" on page 115 in the attached Prospectus

The NCDs will be issued at their respective face values.

Specific Terms of the Issue

The specific terms of each instrument are set out below:

Options

I

II

III

IV

Interest Payment

Monthly

Quarterly

Annual

Cumulative

Minimum Application [4] 

Rs.1,00,000/-

Rs.10,000/-

Rs.10,000/-

Rs.10,000/-

In Multiples of

Rs.100,000/-

Rs.1,000/-

Rs.1,000/-

Rs.1,000/-

Face Value of NCDs (Rs. / NCD)

Rs.100,000/-

Rs.1,000/-

Rs.1,000/-

Rs.1,000/-

Interest Payment [5] 

ECS only

Through various options available

Through various options available

Through various options available

Coupon (%)

11% per annum

11.25% per annum

12 % per annum

12 % per annum to be compounded annually

Yield on redemption

11.57%

11.73%

12%

12%

Put and call option

36 months

42 months

36 months

36 months

Tenor

60 months

60 months

60 months

60 months

Redemption Date [6] 

5 years from the deemed date of allotment

5 years from the deemed date of allotment

5 years from the deemed date of allotment

5 years from the deemed date of allotment

Redemption Amount

Face value plus any interest that may have accrued

Face value plus any interest that may have accrued

Face value plus any interest that may have accrued

Face value plus any interest that may have accrued

Lead Managers to the issue

The commercial or investment banks which have primary responsibility for organizing a given issuance are referred to as Lead Managers. They will find other lending organizations or underwriters to create the syndicate, negotiate terms with the issuer, and assess market conditions.

The Lead Managers to this issue were:

ICICI Securities Limited

Citigroup Global Markets India Private Limited

DSP Merrill Lynch Limited

Registrar to the issue

Registrar to an issue refers to the person appointed by a body corporate or any person or group of persons to carry on the following activities on its or his or their behalf, namely:

Collecting applications from investors in respect of an issue

Keeping a proper record of applications and money received from investors or paid to the seller of the securities and

Assisting body corporate or person or group of persons in:

Determining the basis of allotment of securities in consultation with the stock exchange

Finalizing of the list of persons entitled to allotment of securities

Processing and dispatching allotment letters, refund orders or certificates and other related documents in respect of the issue

In this case of issue of NCDs by Tata Capital, the registrar to the issue was Karvy Computershare Private Limited.

Underwriters to the Issue

There was no underwriting done for this issue.

Credit Rating

The NCDs have been rated 'LAA+' by ICRA (Investment Information and Credit Rating Agency) and 'CARE AA+' by CARE (Credit Analysis & Research Ltd.).

Both these ratings are based mainly on the association of the company with Tata Group and may not necessarily reflect the performance of the company. The company is too new to be assessed and has minimal track record.

The implications of these ratings are:

'LAA+' by ICRA ():

ICRA has rated the NCDs "LAA+". This rating indicates high-credit-quality and also implies that the rated instrument carries low credit risk.

This rating primarily reflects TCL's strong parentage (the Company is owned 100% by 'Tata Sons Limited' (TSL), rated at LAAA and A1+ for its long term and short term debt programmes, respectively, by ICRA) and the strong commitment of TSL to TCL, which ICRA expects would allow the Company to grow its financing volumes by leveraging the strength of the "Tata" brand and by exploiting the synergies with other Tata Group companies by financing various participants in the supply chain as well as some of the end products. While TCL has the challenge of managing relatively newer assets, it is in a superior position (vis a vis other lenders) to comprehend credit risk and to service the borrower on its exposures to entities of the Tata supply chain.

'CARE AA+' by CARE (Credit Analysis & Research Limited):

CARE has assigned a 'CARE AA+' rating to the Issue for an aggregate amount of Rs. 150,000 lakhs having maturity between 1-7 years. Instruments with this rating are considered to offer high safety for timely servicing of debt obligations and carry very low credit risk.

The rating factors in TCL's strong parentage (TCL being a wholly owned subsidiary of Tata Sons Ltd.), the demonstrated support of the Tata group, both, by way of capital support as well as offering of in-house business opportunities (lending opportunities offered by the "Tata ecosystem" comprising dealers/vendors and other business constituents/ relationships affiliated with the group companies). The rating also factors in the brand equity of the parent company which would aid TCL in scaling up its volumes beyond the group related business as well as render it with strong resource raising capabilities.

Mode of Issuance and Trading

The issue is in demat form only and it can be traded in demat form only.

Subscription

Tata Capital Limited received an overwhelming response for its public issue of NCDs. Based on subscriptions of over Rs.3,000 Crore received, the issue was oversubscribed by more than six times (the company wanted to raise Rs.500 Crore).

The Rs.500 Crore issue had an option for the company to retain an additional Rs 1,000 Crore. Tata Capital decided to retain total subscriptions of Rs.1,500 Crore, which is up to the rated amount. The NCDs are listed on the National Stock Exchange (NSE) under the ticker TATACAP.

"The issue has gained significant acceptance and this re-instates the investors' confidence in Tata Capital. Based on the good response that the NCD issue has generated, we feel such bonds will become an instrument of choice for investors and other corporates leading to the development of a strong corporate bond market", said Mr. Praveen P Kadle, Managing Director, Tata Capital Limited.

Usage of Funds

The funds raised through this Issue, after meeting the expenditures of and related to the Issue, will be used for:

The company's various financing activities including lending and investments and

To repay its existing loans and for its business operations including capital expenditure and working capital requirements.

Further, in accordance with the Debt Regulations, the company will not utilize the proceeds of the Issue for providing loans to or acquisitions of shares of any person who is a part of the same group as the company or who is under the same management as the company.

Interim Use of Proceeds

Pending utilization of the proceeds out of the Issue for the purposes described above, the company intends to -

Temporarily invest funds in high quality interest bearing liquid instruments including money market mutual funds, deposits with banks or

Temporarily deploy the funds in investment grade interest bearing securities as may be approved by the Board.

Such investment would be in accordance with the investment policies approved by the Board or the Investment Committee from time to time.

NCDs - A Brief

Debentures

Debentures are long-term debt instrument used by companies to raise funds for its business activities and other purpose. A debenture is a certificate acknowledging debt or loan taken by the company from the investor, on which the company will pay interest and repay the principal amount at the end of the tenure of the debenture.

Non Convertible Debentures (NCDs)

A Non Convertible Debenture is a long term loan on which the company will pay periodic interest and repay the principal amount at the maturity unlike Convertible or Partly Convertible Debenture in which the company may convert total or part of principal amount into equity shares of the company at the time of expiry of maturity period. To simply put, NCDs can't be converted into the equity shares of the company at any time.

Rate of conversion and price of share are decided by the Issuers at the time of floating the Public Issue. Typically, the companies pay less interest on convertible and partly-convertible debentures and more on non-convertible debentures.

Public issue of NCDs to raise funds

Tata Capital had issued NCDs for around Rs.1,500 Crore.

This wouldn't have been surprising and intriguing if not for the following reasons:

For reasons like high costs of fund raising, high costs of issuance, comprehensive regulatory framework and underdevelopment of securitization products, companies in India generally prefer private placements to raise funds.

Most of the corporates are wary of getting the credit rating, which is a mandate in the corporate debt market.

In India the size of corporate debt market has remained insignificant in comparison to that of equity. According to ADB Working Paper (2008) [7] , corporate debt market accounts for only 3.9% of GDP in India, whereas in countries like Korea and Malaysia, the contributions are 61% and 37.5% respectively.

According to SEBI's annual report [8] , no public issues of bonds were made by the corporate sector in 2007-08. However, the corporate sector mobilized Rs.1,28,602 Crore through private placement.

Also, for a corporate bond a non repayment of even a small amount (say Re.1) or a delay for even one day will be treated as a default and this information will be publicly disseminated. So it makes the Corporates or the Issuers to be more comfortable disclosing their data to bankers or investors during private placements rather than disclosing the same through offer documents in public domain during public issue.

The companies should also fully disclose their performances during a public issue, which makes them averse to public issues in general.

Given the above mentioned challenges with the public issue of corporate debt like high cost, credit ratings, public disclosure of un-audited financial statements, it is surprising and interesting that Tata Capital opted to raise funds through public issue of NCDs and managed to get oversubscribed by more than six times too. This leads us to find the reasons for Tata Capital opting for this mode of fund raising and the discussion of the same.

Reasons for fund raising through public issue of NCDs

Due to the global financial crisis in 2008, banks had put a tight credit squeeze on loans offered and investors (mostly Insurance companies, Finance Institutions, Foreign Institutional Investors etc.) became wary of funding loans to corporates.

The exposure (both lending and investment, including off balance sheet exposures) of a bank to a single NBFC should not exceed 10% of the bank's capital funds as per its last audited balance sheet. Banks may, however, assume exposures on a single NBFC up to 15% of their capital funds provided the exposure in excess of 10% is on account of funds on-lent by the NBFC to infrastructure sectors. In times of credit crisis, Banks try to minimize their exposures as much as possible.

Answering questions on how India has been affected by the global economic crisis of 2008, RBI Governor, D Subbarao [9] mentioned the following-

India's financial markets - equity markets, money markets, forex markets and credit markets - had all come under pressure from a number of directions.

The tightened global liquidity situation in the period immediately following the Lehman failure in mid-September 2008, coming as it did on top of a turn in the credit cycle, increased the risk aversion of the financial system and made banks cautious about lending.

These factors attributed to Tata Capital opting for public fund raising, instead of private placements or bank borrowing.

Also, there is a regulation that Non-infrastructure NBFCs can raise only up to 15% of net worth from Bank Borrowings [10] . This also had put a constraint on Tata Capital to opt for Bank Borrowings because as on 30 Sep 2008, the Net Worth of the company was only Rs.210,718 Lakhs, whereas the company wanted to raise funds of minimum Rs.50,000 Lakhs. This fund requirement is almost 24% of the company's net worth.

Because of the liquidity crunch and the above mentioned constraint, it became a challenge to just depend on the one source that corporates always choose - Banks for funds. The crisis also eliminated the option of opting for External Commercial Borrowings (ECBs).

There was another glitch with Tata Capital opting for ECBs.

There has been some end use restrictions put on ECB such as utilization of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate.

Further ECB proceeds are not permitted to be used for investment in real estate, working capital, general corporate purpose and repayment of existing Rupee loans.

Since Tata Capital had planned to use the proceeds for various financing activities including lending and investments, to repay existing loans and for business operations including capital expenditure and working capital requirements, ECB option will not work out in favor of the company.

Though from a company's point of view, accepting FDs (Fixed Deposits) are better than issuing NCDs, since Tata Capital is registered as a NBFC, it is not allowed to issue public deposits to raise funds.

Many a times (or almost always) even highly rated corporates prefer private placement route ignoring the fact that lower cost of capital in the public offering can offset the higher issuance cost. Tata Capital had realized that the costs could be offset and hence opted for the public issue.

Also, Tata Capital saw an opportunity to test the untapped high potential market.

After the brunt bore through the Tata Finance Fiasco, it makes sense for Tata Capital to opt for public issue fund raising, as there will be lot of scrutiny and governance involved in the process too.

All the above factors have led to Tata Capital opting to fund raising through public issue of NCDs.

A brief analysis of the Financial Status of Tata Capital

The company's Debt to Equity ratio before the issue is 2.66 as on September 30, 2008. And it was estimated that this ratio will be 3.38 post the issue of the NCDs.

The Capital Adequacy Ratio (CAR) as on March 31, 2008 and as on September 30, 2008 was 45.5% and 26.1% respectively, which has fallen over the year significantly.

Though Tata Capital managed a marginal net profit in the first six months ended September 2008, it reported a pre-tax loss of approximately Rs.1,800 Lakhs for the nine months ended December, 2008.

The company's subsidiaries Tata Capital Markets Limited, Tata Securities Limited and Tata Capital Pte Limited incurred an aggregate loss of Rs.1,573 Lakhs.

Though all the above financial facts raise concerns, it is too early to comment on the company's performance as most of the costs are because of the new business setup (start-up costs). The company is a relatively new one, set up in 2007 and it has a limited track record by which to judge its success.

Probably, that is why the company was able to solicit good response for its NCD issue. And not to ignore the fact that the Tata lineage would have given it a cutting edge.

Probable risks associated with the issue

The risks linked with the NCD issue of Tata Capital stem from the challenges associated with any NBFC business and the relatively short track record of Tata Capital. However, this credit risk is partly mitigated by the security offered (fixed assets and future receivables) and the debenture redemption reserve towards maturity. Also, the offer is rated LAA+ by ICRA, which is among the higher investment grade ratings and hence the investors should not have any major concerns.

The NCDs are also listed and traded on the NSE and hence investors have the option of cashing out earlier, if the bonds witness frequent trading in sufficient volumes. Also there may not be concerns over liquidity as the investors have a put option at the end of 36 months to redeem their investments, without any interest rate penalty.

Based on the various parameters (or constraints) mentioned in this study and considering the economic environment in which the issue was carried out, it is amazing to see that Tata Capital has managed to acquire funds far and beyond its expectations. And it is also good to note the confidence the investors have shown in the Tata group in spite of the Tata Finance Fiasco, which still remains unsolved. It can only be hoped that Tata Capital will live up to the expectations and trust of the customers and shareholders and fly the flag of the Tata Group high.

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