Non Convertible Debentures (NCDs)

List of Current/Upcoming NCDs

What is NCD?

NCD is a Secure and Redeemable Corporate Bond, a bond issued by a corporation to raise money from the capital market. Unlike equity shares, bondholders do not have any ownership interest in the company. They are also known as securities that do not have any equity element attached to it. NCD are tradable instruments. They are listed with major stock exchanges (BSE and NSE) in India

Investors want investment options that manage liquidity and risks while offering substantial returns. Debentures are long-term financial instruments issued by a company for specified tenure with a promise to pay fixed interest to the investor. Debentures are of two types, namely convertible debentures and non-convertible debentures (NCD).Non-convertible debentures (NCD) are those which cannot be converted into shares or equities. NCD interest rates depend on the company issuing the NCD.

NCD investment can be held by individuals, banking companies, primary dealers other corporate bodies registered or incorporated in India and unincorporated bodies.

When one buys a corporate bond, one lends money to the company. In exchange, the company promises to return the money on a specified maturity date along with a stated rate of interest.

Corporate bonds are debt securities. They are considered as a long-term investment option. The maturity period of these securities ranges from 1 year to 20 years.

The NCD issue process is similar to the IPO process. Investors apply for NCD shares through a broker. Based on the subscription, they receive the number of NCD shares. The NCD's are credited to the demat account and the money gets deducted from the trading/bank account.

NCD's are tradable instruments. Investors can buy/sell in the stock exchange similar to equity shares even before the maturity date arrives.

An investor can hold NCD in demat as well as paper certificates.

Put Option in a NCD

A put option in NCD means that the investor has an option to surrender the NCD if he wants to, and get back his/her principal. The put option provides the investor with a lot of flexibility. If NCD interest rates go up, and the investor can get better rates from the market, he can exercise the put option and get back his/her principal which can be invested elsewhere.

Call Option in a NCD

A call option in NCD means that the company has an option to ask the investor to surrender the NCD in exchange for the principal investment. A call option gives flexibility to the company. If NCD interest rates go down, and the company can get funds at lower rates from the market, it can exercise the call option to give the money back and can raise money from the market at lower rates.

Types of NCDs

The two types of NCDs are secured and unsecured; Secured NCDs are backed by certain assets and so even if the company defaults, the assets of the company can be liquidated to give back the investor’s investment. When the company gets into a financial crunch, there will be problems in getting interest payments in case of unsecured NCDs.

Features of NCDs

• Liquidity

  This is the important feature as highly liquid assets are the need of the hour. In case of emergency, one should be able to readily encash the asset. On that point, NCD scores high as NCDs are listed on the exchanges, liquidity is high. One can easily buy or sell in the secondary market anytime.

• Interest rates

  The returns are higher compared to FDs and NCDs offer high flexibility in terms of tenure as well. Since some of the debentures are unsecured, the rates of returns are quite high. Usually NCD offers an interest rate ranging from anywhere between 8 to 12%. Monthly and annual interest payout option is available. One can even opt for a cumulative payout option.

• Ratings

  Any company which wants to raise capital by means of NCD has to approach credit rating agencies such as CRISIL, CARE, ICRA, etc. for ratings. A company that has higher credit rating simply means that it would fulfill its obligations whereas a lower rating implies that the company has a higher credit risk. If the NCD issuing company defaults on payment, then the rating of the company is downgraded by the rating agencies.

• Risk

  NCDs face default or credit risk. The company may fail to pay the creditors. In case of unsecured NCD, the investor has no option to get back his money. Before investing in an NCD, one has to check the repayment history of the company. Also credit ratings can help one understand about the level of risk involved in investing in a particular company.

• Taxation

  If NCDs are sold within a year, short term capital gains will be applicable as per your tax slab. If sold after a year, long term capital gains would be applied at 20% with indexation.

• Tenure

  NCD is highly flexible with a minimum tenure of 90 days to a maximum of 10 or more years. Based on their requirement, investors can opt for a short tenure NCD or a long tenure NCD.

How to buy NCD?

To buy a NCD, a demat account is necessary that will store all your shares in electronic format. Demat account can be opened with any of the stock brokers. You can buy NCD from a stockbroker (distributor) or directly from the issuing company. Before investing in NCD, one has to check the background of the company well and invest according to one’s goal and time horizon. Understand the company’s objectives behind the NCD issue. Hope you would have got a complete idea about what is NCD bond by reading this article.