May 17, 2019

Issuance of Non Convertible Debentures (NCD’s)

NCD’s are the products offered by various private and public sector corporates through public issues or on private placement basis. Investors want investment options that manage liquidity and risks while offering substantial returns. Debentures are long-term financial instruments issued by a company for specified tenure with a promise to pay fixed interest to the investor. Debentures are of two types, namely convertible debentures and non-convertible debentures (NCD).

NCD investment can be held by individuals, banking companies, primary dealers other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). Invest in secured NCD to get multiple investment benefits.

Convertible Debenture
Convertible debentures are unsecured bonds that can be converted to company equity or stock.

Non-convertible Debentures (NCD)
Nonconvertible debentures are unsecured bonds that cannot be converted to company equity or stock.

  1. Types Of NCDs
  2. NCDs are traded on Stock Exchanges
    2. Issuance and Trading will be in Demat form only.
    3. Interest will be paid through Direct Credit / ECS / RTGS / NEFT mode
    4. A good credit rating is required for the company to issue a NCD.
  3. Features of NCDs
  4. Issuance

Companies provide NCDs through open issues, which the potential investors can buy within specific periods. There are options to buy NCDs from stock markets.

  1. Credit rating

Only companies with good credit rating can have the authorization to issue NCDs. Credit rating agencies also rate NCDs itself. Ratings are subject to revisions regularly.

  1. Interest

The higher credit rating an NCD has, the lesser interest it offers. Almost every NCD promises dual earning potential – growth-based and interest-based or cumulative opportunities.

  1. Return rates

Usually, NCDs give you higher returns (10%-11%), compared to corporate FDs, bank FDs and Government bonds (max 8%).



  1. Participants In NCDs
  • Investors who expects a stable consistent return with least risk.
  • Investors who want to have consistent monthly returns.
  • Fixed Deposit Investors can look at NCD’s to improvise their returns.
  • Investors looking at portfolio diversification with the Fixed Income security.

 

  1. Benefits Of Investing In NCDs

Better Returns - NCD’s provide a higher rate of interest for their investors.
Good Liquidity - To sell NCDs, investor has two options,

1.) Sell on the Stock Exchanges.

2.) Exercise the Put /Call option.

No upfront tax - No tax is deducted at source as per the provisions of Sec 193 of the IT Act.

Diversification - NCD Investments add diversification to your portfolio with income security.

 

  1. Tax Implications Of Investing In NCDs

 

  • No Income Tax is deductible at source as per the provisions of Sec 193 of the IT Act.
  • The interest will be taxable in the usual course as per the income tax slab of the investor.
  • If investor sells the NCD at the stock exchange, it will be treated as a long term capital asset.

 

  1. Key Parameters Of NCDs

 

Coupon Rate: The interest rate payable to the investor.

Face Value: The nominal value of a NCD stated by the issuer.

Redemption: The return of an investor’s principal.

Market Value: The last reported sale price.

Yield: The annual returns on an investment expressed as a percentage.

 

  1. Tips for investing in NCDs
  2. Organizations resort to raising funds using NCDs only to meet a specific business purpose. Read the terms and conditions – if they do not offer you clarity on how/where your money is going to be used, do not invest.
  3. Due to NCD’s non-liquid nature, start small or use money you may not need until the plan matures.
  4. Diversification i.e. investing across various firms and periods can reduce the risks considerably.
  5. NCDs from one single sector (NBFCS that focuses on personal loans) are not safe to invest in. This can lead to higher risk exposure.
  6. NCDs from the secondary markets have always delivered higher returns in the past. This is when you buy older NCDs when a firm issues a new one.
  7. Never go by the interest rate alone. It will not matter if the NCD yield (that decides your real returns) remains low.
  8. The perfect time to sell your NCD is when its interest is due. This is because that’s premium trading time for a non-convertible debenture. You will make more money out of it.

 

NOTE:

 

Non-convertible debentures are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counterparts.

An NCD can be both secured as well as unsecured. For secured debentures, which are backed by assets, in case the issuer is not able to fulfil its obligation, the assets are liquidated to repay the investors holding the debentures.Secured NCDs offer lower interest rates compared with unsecured ones. If you want a regular income from NCDs, you can pick those that pay interest on a monthly, quarterly or annual basis. If you just want to grow your wealth, you can opt for cumulative option where the interest earned is reinvested and paid at maturity.

Companies seeking to raise money through NCDs have to get their issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. NCDs with higher ratings are safer as this means the issuer has the ability to service its debt on time and carries lower default risk.

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