Non-Convertible Debentures (NCD)
To raise the long-term capital for the company, Non-convertible debentures (NCD) are used through the public issue. NCD bonds are debt (financial) instruments packed with a fixed period. The investor once invest in NCD will receive regular interest at a definite rate.
Non-convertible Debentures in the share market are rated by credit rating agencies. These NCD ratings will help the investors to learn about the company’s history and creditworthiness and how well it is likely to perform in the future. Often the huge companies issue these NCD bonds without offering the option of converting them into equity.
Features of the non-convertible debentures
- NCD regulator: it is important to learn that non-convertible debenture in India is regulated by DEBENTURE TRUSTEE. The debenture trustees are appointed by the company while issuing the NCD to the investors.
- Safety: NCD bonds are secured through the issuer company assets. In simple words- An issuing company has to deliver/ complete the debt obligation under any circumstances.
- Credit-Ratings: Since the NCD issuing companies are not secured by any collateral, they are rated by the credit rating agencies such as CRISIL. This means the company with a good rating can only issue NCD debentures. The credit rating agencies regularly rate these NCD bonds.
- Liquidity: Non- convertible bonds, most of them, are listed on the stock exchanges. In the dire need of liquidity, NCD bonds can be sold in the market depending on the prevailing interest rate, bond yield, etc.
- Returns/ Interest rate: NCD interest rates are fixed. Although the returns percentage has an inverse relationship with the credit ratings. E.g. High creditworthy NCD will offer less/ reduced interest rates.
Things to consider before investing in NCDs:
Check company’s background: Make sure you research the company’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 sign 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. However, 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. A higher rating will suggest the company has the ability to repay its loans.
Taxation benefits of NCD debentures:
There are tax benefits if you invest in NCD.
- The interests earned on the NCD investment, capital gain tax are implicated in it. Hence investor is liable to pay the tax on the NCD earned interest.
- If the NCD bonds are held in demat form, then it is exempted from the TDS.
- If the investor falls under a low tax bracket, NCD is the ideal investment product.