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Non-Convertible Debentures

What are Non-Convertible Debentures? 

Companies need capital to ensure the smooth running of their business operations. To raise long-term capital, they issue NCDs, which fall under the debt class of financial instruments. They are fixed-income instruments that high-rated companies issue to raise capital from the general public. These instruments cannot be converted into equity shares. Since they are non-convertible, they usually carry higher rates of interest. 

Unlike holding shares of a company that gives part ownership to the shareholders, an investment in Non-Convertible Debentures provides no present or future stake in the company due to the non-convertibility element. When investors invest in NCDs, they get regular interest payments until the fixed tenure is completed. At the end of the stipulated period, the company redeems the debenture. They are backed by those assets which have not been pledged for availing of a different loan.

Key Features

  • Low Risk: Companies with a high credit rating issue them to raise capital

  • Regular Interest: They offer regular interest that is directly credited to the bank account

  • Easily Tradable: They are traded in the open market and exchanges and can be easily bought

  • Flexible: Their flexibility ensures a choice across a range of tenures

Key Benefits

  • 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

  • Choose a company with a credit rating equal to or higher than AA. Various credit rating agencies provide credit ratings to them based on the company’s potential to provide regular interest and repay principal.

  • Make sure you understand in detail what non-convertible debentures are before you start investing.

  • 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.

  • Ideal time to sell these debentures is when the interest is due, as the demand at this time is the highest. You stand to make better profits at this time.

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

Ans: 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.

Ans: 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.

Ans: 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.