What is Non Convertible Debentures?

In times of market uncertainty, everyone is looking for stable investment options with fixed returns. Among all the other fixed return options, Non-Convertible Debentures (NCDs) stand out as a popular choice, often offering higher returns than traditional bank fixed deposits.

In this blog, we provide a detailed overview of non-convertible debentures, including their types, features, and factors to consider before investing in them.

What are Non-Convertible Debentures?

A Non-convertible Debenture (NCD) is a financial instrument which is generally used by companies to raise capital for the long term. Non-convertible debentures cannot be converted into equity shares of the issuing companies. They offer a fixed interest rate or coupon along with the principal on the maturity date. They offer slightly higher returns than any other bank fixed deposit. As non-convertible debentures are not converted into equity, they remain a pure debt instrument throughout the investment period.

Features of Non-Convertible Debentures

The key features of non-convertible debentures are as follows:

1. Fixed Returns: The returns offered by the non-convertible debentures are fixed and are paid by the issuer at a predefined fixed interval.
2. Rating: The non-convertible debentures are rated by credit rating agencies such as CRISIL, ICRA, or CARE.
3. Liquidity: The issuing companies offer liquidity to their investors by making them list on the stock exchange.
4. Taxability: Interest received by an investor on the NCDs is taxable based on their income tax slab.
5. Duration: There are various tenures available for an investor to choose from the given options.

Read Also: Non-Convertible Debenture (NCD) vs Fixed Deposit (FD)

Types of Non-Convertible Debentures

The several types of non-convertible debentures are as follows:

1. Secured

The secured NCDs are backed by a specific asset of the issuing company. Therefore, in case of default, the investor can claim the assigned asset and recover their amount.

2. Unsecured

The non-convertible debentures are not secured by any asset; hence, in case of default, the investors are required to wait until the assets of the company are sold so that their liabilities can be met.

3. Listed

When an issuing company lists the debentures on the stock exchange to provide liquidity to its investors.

4. Unlisted

Unlisted NCDs are those which are not listed in the secondary market. Hence, they are generally considered illiquid.

5. Long-term

Long-term NCDs are generally issued for more than three years.

6. Short-term

These debentures are issued for a period of one year to three years.

7. Callable

Callable NCDs give the issuer the right to redeem them before the maturity date.

8. Putable

These NCDs come with an option that the buyer can redeem the debenture from the issuing company anytime before the maturity period.

Read Also: How to Buy NCDs in India?

How to Buy Non-Convertible Debentures

The following are two ways through which one can buy the non-convertible debentures:

1. Primary Market

This is where NCDs are issued for the first time by the company. They are offered to the public for subscription, and investors can apply using their demat account or through designated financial institutions by filling out an application form.

2. Secondary Market

When the NCDs are issued by the companies and are listed in the secondary market, allowing investors to purchase and sell them easily through an exchange similar to any other equity shares.

Factors to Consider Before Investing in Non-Convertible Debentures

The key factors to consider before investing in non-convertible debentures are as follows:

1. Risk: An investor should check the credit rating before making any investment in non-convertible debentures. And it is also advisable to avoid investing in NCDs with a rating below A.
2. Higher Returns: NCDs offer higher returns than the prevailing government bonds and FD rates. But they are not risk-free like government bonds.
3. Tenure: One should choose the tenure of NCD based on their investment horizon or financial goal.
4. Listed Non-convertible Debentures: An investor should opt for NCDs which are listed on the stock exchange, as they can provide liquidity before the maturity date.
5. Taxation: The interest received on the NCDs is added to your income and taxed based on your income tax slab. Hence, investors should check the tax liability which can arise while investing in NCDs beforehand. 
6. Reinvestment Risk: If the interest rates in the economy are declining, then the proceeds of the NCDs on maturity, when reinvested in another NCD, might yield lower returns.

Conclusion

In summary, Non-Convertible Debentures offer investors an attractive way to earn fixed returns, often higher than traditional fixed deposits. As the name suggests, these instruments cannot be converted into equity shares and remain pure debt throughout their tenure. Companies issue them with varying maturities, coupon rates, and payout structures, giving investors flexibility in choosing options that match their financial goals. However, NCDs are not entirely risk-free, as they carry default risk. This is why credit rating agencies assess them, and why it is wise to invest only after reviewing the ratings and consulting a financial advisor.

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