Non-Convertible
Debentures
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What are Non-Convertible Debentures?
Non-Convertible Debentures (NCDs) are fixed-income financial instruments issued by companies to raise long-term capital. The companies who want to raise long-term capital, they issue NCDs which falls under the debt class of financial instruments. Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company. Since they are non-convertible, NCDs usually carry higher rate of interest.
NCDs offer fixed interest payments, usually semi-annually or annually, making them a preferred choice for investors with low risk appetite. These debentures are usually issued by companies with strong credit ratings, ensuring a higher degree of safety for investors. When investors invest in NCDs, they get regular interest until the fixed tenure is completed. At the end of the period, the company redeem these debentures.
Key Features of NCDs
- Fixed Returns: Investors can enjoy regular interest income at predefined intervals at a very low risk.
- Diverse Tenures: NCDs offer flexible maturity options ranging from 1 year to 10or 20 years depending on the companies requirements.
- Tradable: Most NCDs are listed on stock exchanges and offer high liquidity.
- Credit Rating: Generally, NCDs are assessed by agencies like CRISIL, ICRA, or CARE, offering transparency on the issuer's credibility.
- Low Risk: Companies with high ratings issue NCDs to raise funds from public.
Benefits of NCDs
- Diversification: When you invest in NCDs online, you can ensure effective portfolio diversification.
- Liquidity: Being listed securities, holders can sell their investments instantly.
- Capital Appreciation: They can provide better profits to holders as they benefit from the price fluctuations.
- No TDS: Investing in this instrument offered in the Demat mode do not attract Tax deduction at source.
Tips for Investing in Non-Convertible Debentures
- Choose a company with a credit rating equal to or higher than AA.
- Diversify your portfolio through these debentures available online across various companies.
- Check the Capital Adequacy Ratio (CAR) of the company that can sufficiently survive market losses.
- The company must have 50% of its assets towards Non-Performing Assets (NPAs), and it should not drop below this level.
Types of Non-Convertible Debentures
Secured
They are backed by the issuer company's assets and protect investors in case the company defaults on interest or principal repayment.
Unsecured
This type of debenture is not backed by the issuer company's assets, and the investors can not claim payment through liquidation if the company defaults on interest or principal repayment.
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Frequently Asked Questions
How do you invest in non-convertible debentures online?
Similar to IPOs, they are also listed through a public issue to which you can subscribe. Afterwards, they are listed on the stock exchanges, and you can buy them anytime after opening a Demat and a trading account.
Are Non-Convertible Debentures in India taxable?
They do not attract TDS, but if sold within a year, short-term capital gain tax is applicable along with long-term capital gains tax if sold after a year.
What is the minimum investment amount when investing in Non-Convertible Debenture Bonds?
The minimum amount varies for every application and is decided by the issuer company. However, you can start investing with a minimum amount of Rs 10,000.
What are non-convertible debentures?
Non-convertible debentures (NCDs) are unsecured bonds. This means that there is no asset that has been put as security for these bonds. Non-convertible means that they cannot be converted into equity of the company at a later date. In an unsecured bond, in case of default by the entity that has issued the bonds, there are no specific assets on which bondholders can lay claim for getting the amount due to them, by selling that particular asset. So in case of default on an unsecured bond, bondholders or creditors will have to start bankruptcy proceedings against the company for recovering the amount due to them.
What are the benefits of non-convertible debentures?
The main benefit of non-convertible debentures (NCDs) is that because they are unsecured, the interest rate paid on them is higher. Bondholders or creditors are taking a higher risk when they invest in a non-convertible debenture. They are compensated for this risk through payment of higher interest rate.
Is NCD better than FD?
The credit risk of non-convertible debentures (NCDs) is much higher than that of Fixed Deposits (FDs). Therefore, the interest rate that you get on an NCD is usually higher than that on an FD. Credit risk is the risk of default by the entity, whose NCDs you have bought or with whom you have put in the FD, when the time for paying you back comes.
So if your risk tolerance is higher, and you want to earn higher returns then NCD is the better option for you. However, if your risk tolerance is lower, then FDs may be the right option for you.
The risk and return of an NCD also depend on its credit rating. Each NCD carries a credit rating. This rating is given by a credit rating agency. The higher the credit rating of an NCD, the lower is its risk of default. And therefore, lower will be the interest rate that it will give. The lower the credit rating of an NCD, the higher is its risk of default. And more will be the interest rate that it will give
