Debentures are long-term financial instruments used to recognise an issuer’s debt commitments. Some debentures have a condition that allows the owner to convert them into shares at any time after a certain period of time has passed. Non-convertible debentures are debt instruments that cannot be converted into shares or equity (or NCDs).
Businesses utilize non-convertible debentures to raise long-term financing through a public offering. To compensate for the non-convertibility, lenders are frequently offered a greater rate of return than with convertible debentures.
NCDs also provide their owners with a number of other advantages, including improved liquidity through stock market listing, tax deductions at the source, and security since they can only be issued by businesses that meet the RBI’s NCD issuer standards for credit ratings. In India, they must be given with a minimum maturity of 90 days.
What are Corporate Non Convertible Debenture?
Corporate non-convertible debentures (NCDs) are a type of long-term financial instrument. This is accomplished by bringing up a public problem. NCDs are debt instruments with a predetermined maturity date and a fixed rate of interest for investors. In order to secure long-term capital appreciation, high-rated companies usually issue them as a public offering. They also provide greater interest rates as compared to convertible debentures.
Before investing, do your homework on the company’s history. Check to see if the firm has ever successfully obtained finance and paid off its debts. If the company has completed its tasks, this is a positive indicator. Otherwise, you should avoid the firm.
The interest rate is the most appealing feature of NCDs. However, this should not be the primary motivation for investing. It is critical that the company’s high interest rate is supported by excellent credit ratings. Examine the credit ratings assigned to the firm by several rating organisations, such as CRISIL, before making a choice. A better rating indicates that the firm will be able to repay its debts.
Tips for Investing in NCDs
- NCDs are used by businesses to increase income for a specific commercial aim.
- Don’t invest if the terms and conditions are unclear about how/where your money will be used.
- Diversification, or investing in a variety of businesses and historical periods, can help to reduce risk.
- NCDs from secondary markets have historically produced better yields. When a company issues a new NCD, you can acquire current ones.
- Never make a decision solely based on the interest rate. It won’t make a difference if the NCD yield (which determines your real returns) stays low.
- When the interest on your NCD is due, this is the best moment to sell it. The best moment to buy a non-convertible debenture is right now that is as early as possible. It’s conceivable you’ll make more money as a consequence.
- NCDs issued by a particular sector (NBFCs that specialize in personal loans) are high-risk investments. As a result, you might be at more risk.
When are these Debentures called Non-Convertible Debentures and under what circumstances?
Debt consists of non-convertible debentures. Since they are not convertible, they cannot be converted into stock or equity. NCDs have a defined maturity date and interest is paid monthly, quarterly, or yearly, depending on the fixed period selected.
When compared to convertible debentures, they offer better yields, more liquidity, fewer risk, and tax benefits to investors. A non-communicable disease (NCD) is as follows: When the corporation issues NCDs or trades on the secondary market, you can buy. You must consider the company’s credit rating, the issuer’s honesty, and the coupon rate of the NCD. Buying NCDs with better ratings, such as AAA+ or AA+, may be advantageous.
Features of a Non-convertible Debenture
- Credit Rating: Businesses are ranked by credit rating agencies such as CRISIL, CARE, and others. A company’s rating is critical in establishing its potential. A better credit score indicates that the business will be able to meet its financial commitments. A bad credit rating, on the other hand, implies that the company has serious credit problems. Rating agencies will penalize an issuing firm if it fails to make payments.
- Interest Rate: If held to maturity, NCDs can pay a high interest rate ranging from 7% to 9%. Interest is paid out on a monthly, quarterly, semi-annual, or yearly basis. NCDs also provide a cumulative payment option. In addition, the interest rate on unsecured NCDs may be higher.
- Taxation: Depending on the investor’s tax rate, NCDs have varied tax consequences. If NCDs are sold within a year, the STCG rate is determined by the income tax bracket. If the NCDs are sold after a year or before the maturity date, the LTCG will be 20% with indexation. Interest income from NCDs is taxed in the same way as fixed income securities under ‘income from other sources.
- Competitive interest rates: In the past, NCDs offered interest rates that were competitive with those given by other fixed-income investments.
- Variable Duration: NCDs have a variable duration that can run from 2 to 20 years, giving them a better chance of maturing.
- High amount of risk is involved: As the system’s interest rate rises, an NCD loses value and gains value as the rate decreases. If the NCD is held until maturity, however, the stated return is likely to be realized, and the risk of interest rate volatility is eliminated or minimized.
- Is credible and of a good rating: Accredited and professional credit rating agencies give NCDs a professional rating.
- Listed in securities: NCDs are usually listed securities, which means they may be traded in the secondary market before they mature.
NCDs provide investors with better returns than other fixed income vehicles. NCDs might also help with portfolio diversification.
As part of public offerings to obtain funds, many businesses, including IIFL Home Finance, Indiabulls Housing Finance, and Edelweiss Financial Services, have issued non-convertible debentures with interest rates ranging from 8.25 percent to 9.7 percent. These NCD offers appear to be advantageous at a time when fixed deposit rates are in the low single digits.
Non-convertible debentures (NCDs) were a tempting source of income for regular investors until two years ago. However, a string of bank collapses in the previous three years has threatened this position. After properly assessing the qualities of the issuer, investors may still contemplate investing in NCDs.