Non Convertible Debentures - NCD
Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer. Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner.The debentures which can't be converted into
shares or equities are called non-convertible debentures (or NCDs).
Description:-
Non-convertible debentures are used as tools to raise long-term funds by companies through a public issue. To compensate for this drawback of non-convertible, lenders are usually given a higher rate of return compared to convertible debentures.Besides, NCDs offer various other benefits to the owner such as high liguidily through stock market listing, tax exemptions at source and safety since they can be issued by companies which have a good credit rating as specified in the norms laid down by RBI for the issue of NCDs. In India, usually have to be issued of a minimum maturity of 90 days.
Non-convertible debentures(NCDs) are a financial instrument that is used by companies to raise long- capital. This is done through a public issue. NCDs are a debt instrument with a fixed tenure and people who invest in these receive regular interest at a certain rate.
Why is it called non-convertible?
Some debentuers can be converted into shares after a certain point in time. This is done at the discretion of the owner. However, this is not possible in the case of NCDs. That's why they are known as non-convertible. Even though NCDs cannot be converted into shares, they offer other benefits.
* High interest rates
The rate of return raturn on NCDs is 11-12%. This is high compared to most investment options. For example, fixed deposits (FDs) are another popular avenuewhere people put their money for regular returns. However, the returns are much lower.
There are various interest payout options including monthly, quarterly, semi-annually and annual payments. The maturity period for an NCD can be anywhere between 90 days to 20 years. This gives you the flexibility to choose between short and long tenures based on your investment goals.
* Liquidity
Since they are listed on the stock exchanges,NCDs are easy to withdraw. Redeeming your NCD investment may be a little tougher than selling regular stocks, but they are more liquid than bank fixed deposits.
* Important terms you should know:
* Secured and unsecured NCDs
An NCD can either be secured or unsecured. A secured NCD is backed by the issuing company's assets. This means that the company has to fulfil its debt obligation whatsoever. However, that's not the case for unsecured NCDs. This makes secured NCDs safer since they have a lower default risk.
* Rating
If you seek to buy NCDs, it is very important to know the rating of the debenture before you buy it. Every company that seeks to raise money through an NCD is rated by agencies such as fitch Ratings, CRISIL, ICRA and CARE. These rating agencies rate the company based on its ability to service its debt on time. So, a lower rating means a higher credit risk.
* Tenor
A non convertible debenture is simply a debt instrument used by a company when it wishes to raise money from the public. The company issues a debt paper for a specific tenor. During this period, it pays a fixed rate of interest to the buyer. This could be on a monthly, quarterly or bannual basis. At the end of the tenor, the money that is invested is returned back to the buyer.
* Yield
Yield is a financial jargonused to describe the income return earned on a security over a specific period of time. In case of NCDs, the yield on redemption has been quite attractive for buyers. This is because they generally offer higher yields when compared to even corporate FDs.
Things to consider befor investing in NCDs.
* Check company's background
Make sure you research the compamy's history before you invest. Check if the company has raised money in the past and has successfully repaid its debts. It is a good sing if the company has met its obligations. Else, you may want to avoid investing in the company.
* Check company's credit rating
The biggest draw for NCDs is the interest rate offered. Howerer, that should not be the sole reason to invest. It is important that the high interest rate offered by the company is backed by good credit ratings. Study the credit ratings given to the company by different rating agencies such as CRISIL before you make your decision. Ahigher rating will suggest the company has the ability to repay its loans.
To sum up
When compared to other fixed income instruments, NCDs offer higher returns to the investor. In addition, NCDs can be a good way to diversify your portfolio.
