Is Demat account needed to invest in NCDs?

If you intend to invest in NCDs then it is essential to have a demat account as most NCD issuers are only issuing in demat mode. It is not only cost effective but also quicker and simpler.

Apr 20, 2019 11:04 IST India Infoline News Service

Non-convertible debentures (NCDs) are debt instruments issued by companies to raise money. In India, it is the NBFCs who have been most actively raising funds in the NCD market. NCD is a form of medium to long term fund raising for corporates and all NCDs have to be necessarily credit rated. The rate of interest on the NCD will depend on the credit rating and the tenure and the yield will vary based on whether the interest payment is done monthly, quarterly or annually.
 
Broadly, NCDs come in two forms i.e. secured and unsecured. Unsecured NCDs pay a slightly higher interest rate compared to Secured NCDs as they have a higher risk element in them. Secured NCDs will rank higher than all unsecured debt of the company in the event of payment of interest and principal. NCDs are issued in physical form and also in demat mode. Of late, most companies prefer to use the demat mode and we shall discuss this point in much greater detail.
 
Key features of recent NCD issues
Issuer Issue Close Interest rate Tenure of NCD Market Lot / FV Issue Mode
L&T Finance 09th Apr 2019 8.70-8.90% 3 to 8 years 1 / 1000 Demat Only
L&T Finance 07th Mar 2019 8.75-9.20% 3 to 10 years 1 / 1000 Demat Only
Indiabulls Cons 01st Mar 2019 10.40-11.00% 2 to 5 years 1 / 1000 Demat Only
Shriram Trans 31st Jan 2019 9.12-9.70% 3 to 10 years 1 / 1000 Demat Only
ECL Finance 31st Dec 2018 9.95-10.60% 3 to 10 years 1 / 1000 Demat Only
Source: NSE
 
The option to hold NCDs in your demat account was always available even in the past. Of course, investors had the choice between holding bonds in physical form and in demat form. However, if you look at the NCD issues in the last few months, all the NCD issues are coming in compulsory demat mode only. That means, there will not be any physical certificate allotment of the NCDs and only demat allotment will be done. This makes it mandatory for investors to have an active demat account before applying for NCDs. Holding in NCDs in demat account is also a lot simpler as it becomes easier to sell these bonds in the secondary market and also get a more comprehensive view of your assets through your demat account. If you intend to invest in NCDs then it is essential to have a demat account as most NCD issuers are only issuing in demat mode. It is not only cost effective but also quicker and simpler.
 
Investing in NCD via ASBA applications
 
One trend that has picked up in the last few months is investing in NCDs through the ASBA route. Application supported by blocked amount (ASBA) was introduced by SEBI to ensure that the application money does not go out of the bank account of the investor till the time the allotment is made. In ASBA, only the amount is blocked when you apply for the NCD. You continue to earn the interest on this balance and the amount only gets debited to your bank account on actual allotment. The ASBA is unblocked in the case of cancellation of the issue or proportionate allotment. But why is ASBA relevant?
 
ASBA facility is the key to building liquidity and retail interest in NCDs. Most brokers offer the ASBA facility only through their online trading accounts and in such cases the demat linkage is mandatory. By making NCDs compulsorily on demat mode, it automatically becomes ASBA compatible. This is one of the reasons most of the recent NCD issues are on “Demat only” mode. Just as SEBI has done away with physical transfers in shares, we may see the trend towards demat issue of NCDs only. Your demat account is now a must!

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