January 2, 2024

What Are Non Convertible Debentures

What Are Non Convertible Debentures?

Non Convertible Debentures (NCDs) are fixed-interest financial instruments issued by companies to raise long-term funds. They cannot be converted into equity shares of the issuing company, thus retaining the nature of debt throughout their tenure.

Ncd Full Form In Finance

NCD full form in finance is Non Convertible Debentures. These instruments represent a type of borrowing where corporations raise capital by issuing debt. Unlike equity shares which signify ownership, NCDs are purely debt instruments, offering a fixed return and not conferring any ownership rights to the holders.

Non Convertible Debentures Example

To understand NCD, let us consider a short example:

XYZ Ltd., a reputed infrastructure company in India, wants to fund its new metro rail project but doesn’t want to dilute its equity. It decides to issue NCDs worth ₹500 crores with a tenure of 7 years, offering an annual interest rate of 8%. An investor, Mr. Verma, buys NCDs worth ₹10 lakhs. He will receive a fixed interest of ₹80,000 annually. After 7 years, his principal amount of ₹10 lakhs will be returned. If the company had issued convertible debentures, Mr. Verma might have had the option to convert his debentures into company shares. However, with NCDs, no such option exists.

How To Invest In Non Convertible Debentures?

To invest in NCDs, begin by researching companies issuing NCDs and understanding their credit ratings. NCDs are attractive to investors because they provide a fixed return in the thriving Indian financial markets. Let’s look at the next steps to investing in Non Convertible Debentures:

  • Brokerage Account: Ensure you have a Demat account with a registered broker like Alice Blue.
  • Application Process: Once a suitable NCD is identified, apply either online through the broker’s platform or offline by submitting the application form.
  • Payment: Make the necessary payment through net banking, cheque, or other accepted methods.
  • Allotment & Interest: Once allotted, the NCDs will reflect in your Demat account. The interest will be credited to your bank account at specified intervals.

Features Of Non-Convertible Debentures

One of the primary features of NCDs is their Fixed Interest Rates. The amount of interest that an investor will receive is predetermined, and they will receive it at set intervals. Other key features include:

  • Fixed Interest Rates:

NCDs come with an inherent promise – the assurance of fixed interest rates. This means, regardless of market fluctuations or varying economic conditions, the interest payout to the investor remains unchanged. Such predictability not only facilitates better financial planning for the investor but also provides a shield against interest rate risks in the market.

  • Non-convertibility:

A distinguishing trait of NCDs is their non-convertibility. Unlike convertible debentures, which offer an option (usually at the discretion of the investor) to convert the debt into equity shares of the issuing company, NCDs lack this feature. Thus, no matter the performance or stock price of the issuing company, NCD holders will never have a stake in the company’s ownership.

  • Security:

NCDs can be either secured or unsecured. Secured NCDs have a distinct advantage – they are backed by specific assets of the issuing company. In the unfortunate event of the company defaulting or facing bankruptcy, the sale of these assets can be used to repay NCD holders, providing an additional safety net to investors. It’s akin to having collateral against a loan.

Types of Non-Convertible Debentures

There are six types of Non-Convertible Debentures, each of which is designed to meet a specific need among investors:

  1. Secured NCDs:

When you invest in Secured NCDs, it’s like lending money to a company that offers its assets (like buildings or machinery) as a safety net. If the company can’t pay you back, they’ll sell these assets to ensure you get your money. Because they’re backed by these assets, they usually come with lower interest rates.

  1. Unsecured NCDs:

Investing in Unsecured NCDs means lending money without any specific assets tied to your investment. They might offer you a higher interest rate compared to secured ones. But remember, higher interest often means higher risk. If things go south, there aren’t specific assets set aside for you.

  1. Callable NCDs:

Here, the company can decide to repay you before the agreed end date. Why would they do that? Maybe they believe they can get funds at a cheaper rate elsewhere. So, there’s a possibility you might get your money back sooner than expected.

  1. Puttable NCDs:

This type gives you some power! After a certain period, if you feel you can get a better deal elsewhere, or simply need your money back, you can decide to sell your debenture back to the company.

  1. Listed NCDs:

These are debentures you can buy or sell on the stock market, just like shares. It offers flexibility, so if you need your money before the debenture’s maturity date, you can sell it to someone else.

  1. Unlisted NCDs:

These aren’t available on the stock market. So, if you invest in one, it might be harder to sell it before its maturity. But, often, they might lure you with better interest rates to make up for this.

Advantages Of Non Convertible Debentures

The main advantage of Non Convertible Debentures is predictable income. When you invest in NCDs, you’re essentially locking in a fixed interest rate. This means you can expect a steady stream of income at regular intervals. Unlike stock dividends, which can vary based on the company’s performance, the interest from NCDs remains constant. Other Advantages are given below:

  • Higher Interest Rates:

NCDs generally offer higher interest rates compared to traditional savings accounts or fixed deposits. This makes them an attractive investment option for those looking to earn better returns without diving into the stock market.

  • Flexibility:

With options like callable, puttable, listed, and unlisted NCDs, you have a variety of choices. This allows you to pick a debenture that suits your financial needs and risk tolerance.

  • Asset-Backed Security:

Secured NCDs are backed by the assets of the company. This provides a safety cushion. If the company faces financial trouble, these assets can be sold to pay you back.

  • Liquidity:

Listed NCDs provide liquidity since they’re traded on stock exchanges. So, if you need funds, you can easily sell your debenture in the secondary market.

  • Tax Benefits:

In some cases, companies issue tax-free NCDs, where the interest you earn isn’t subject to tax, increasing your effective returns.

Non Convertible Debentures Risk Factors

One of the prominent risk factor of Non Convertible Debentures is interest rate risk. If market interest rates rise after you’ve invested in an NCD, your locked-in rate might appear less attractive, especially if you hold an unlisted NCD that’s harder to sell. Other risk factors include:

  • Credit Risk

The company issuing the NCD might face financial troubles and default on their interest payments or not repay the principal amount.

  • Reinvestment Risk

With callable NCDs, the company might choose to repay you before maturity if market rates drop. This could leave you having to reinvest at a lower interest rate.

  • Liquidity Risk

Unlisted NCDs aren’t traded on stock exchanges. If you need funds, selling them might be challenging.

  • No Ownership Rights

Since NCDs are debt instruments, as an investor, you don’t get any ownership rights in the company, unlike with equity shares.

  • Market Risk

For listed NCDs, market conditions can impact their price. If you need to sell during a downturn, you might get less than your investment’s face value.

Non Convertible Debentures Vs Bonds

One main difference between Non-Convertible Debentures (NCDs) and Bonds is that while both NCDs and bonds are debt instruments that entities use to raise capital, NCDs are specific to private companies, whereas bonds have a broader range of issuers including both governmental and private entities.

ParameterNon-Convertible DebenturesBonds
NatureDebt instrument issued by companies.Debt instrument that can be issued by government, municipalities, or companies.
ConvertibilityCannot be converted into equity shares.May or may not be convertible, based on bond type.
SafetySecured NCDs offer asset-backed safety.Government bonds are considered safest; corporate bonds depend on the issuer’s creditworthiness.
LiquidityListed NCDs are traded on stock exchanges.Most bonds, especially government ones, have high liquidity.
Interest RatesTypically higher than traditional savings.Varies; government bonds often offer lower interest rates.
TaxationInterest is usually taxable.Depends on the bond type; government bonds might offer tax benefits.

Non Convertible Debentures Taxation

When you invest in Non-Convertible Debentures (NCDs), any gains realized from them are subject to taxation, and the tax treatment is determined based on the holding period of these NCDs:

  • Short-Term Capital Gains: If you sell your NCDs before completing one year from the date of investment, the gains you make are categorized as short-term. These short-term gains are added to your total income and taxed at your applicable slab rate.
  • Long-Term Capital Gains: If you hold onto your NCDs for more than one year, then any gain resulting from their sale will be considered long-term. Such gains are taxed at a rate of 20%. Additionally, you benefit from indexation, which adjusts the acquisition cost of the NCD for inflation. This usually reduces the taxable gain amount, thereby potentially leading to lower tax liability.

It’s essential for investors to consider these tax implications while making investment decisions and planning their finances, as it directly impacts the net returns from their NCD investments.

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:

What is Dividend Policy
What Is Unclaimed Dividend
Types Of Dividend Policy
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Property Dividend
Joint Stock Company
Difference Between Partnership Firm And Joint Stock Company
Rolling Returns

What Is Meant By Non Convertible Debentures  – Quick Summary

  • NCDs are debt instruments that can’t be converted into equity shares of the issuing company.
  • They stand for “Non-Convertible Debentures” in finance.
  • You can invest in NCDs through primary issuances or by purchasing them on the secondary market.
  • Key features include fixed interest rates, non-convertibility, potential asset security, varying tenures, taxation on interest, and possible stock exchange listing.
  • Types include secured, unsecured, callable, puttable, listed, and unlisted NCDs.
  • NCDs offer predictable income, higher interest rates, flexibility, security, liquidity, and potential tax benefits.
  • Risks involve interest rate fluctuations, issuer’s credit risk, reinvestment concerns, liquidity challenges, lack of ownership rights, and market vulnerabilities.
  • When compared to bonds, NCDs are specific to companies, usually offer higher interest, and have particular taxation implications.
  • Gains from Non-Convertible Debentures (NCDs) are taxed based on their holding period. It can be taxable as STCG or LTCG.
  • Utilize the ANT API from Alice Blue to commence your trading endeavors. ANT API is completely Free of Cost, unlike other brokers who charge from ₹ 500 to ₹ 2000 per month. With ANT API, your orders will be executed in less than 50 milliseconds – one of the fastest in the industry.

What Is Ncd In Share Market – FAQs  

What are Non-Convertible Debentures?

NCD, or Non-Convertible Debenture, is a type of debt instrument issued to raise capital by corporations. Unlike convertible debentures, NCDs cannot be converted into company shares. They offer a fixed interest rate, making them a preferred choice for fixed income investors. NCDs can be traded on stock exchanges if they are listed.

Is it good to buy NCD?

Investing in NCDs can be a good option if you’re looking for regular income and are comfortable with the associated risks. Remember to consider the company’s credit rating, your own risk tolerance, and investment horizon.

Is NCD tax free?

Not all NCDs are tax-free. While the principal amount isn’t taxable, the interest usually is. Some companies do issue tax-free NCDs, where the interest isn’t subject to tax.

What happens to NCD after maturity?

After maturity, the company repays the principal amount to the investor. If you hold a physical certificate, you’d need to submit it to the company to get the amount. For dematerialized NCDs, the amount is directly credited to your account.

Can I sell my NCD?

If your NCD is listed on a stock exchange, you can sell it in the secondary market before its maturity. However, unlisted NCDs might be harder to sell.

What is the minimum tenure of NCD?

Depending on the NCD, the minimum term can be anywhere from two years to twenty years. The company that issuing the bond will say exactly how long it is valid during the launch.

To understand the topic and get more information, please read the related stock market articles below.

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