What are (NCDs) Non-Convertible Debentures?

Non-convertible debentures (NCDs) are a type of debt instrument that is issued by a company to raise capital. NCDs are issued in denominations of a fixed amount and are generally issued for a period of five to ten years. They are typically issued to institutional investors, such as banks, mutual funds, and insurance companies, and are not typically available to retail investors.

NCDs are called “non-convertible” because they cannot be converted into equity shares or other securities. They are also known as fixed income securities, as they pay a fixed rate of interest to investors. The interest rate on NCDs is usually higher than the interest rate on bank deposits, as NCDs carry higher risk for investors due to the fact that they are not secured by any assets.

NCDs are typically rated by credit rating agencies, which provide an independent assessment of the issuer’s creditworthiness and the risk associated with the NCDs. The rating reflects the likelihood that the issuer will be able to meet its financial obligations and pay the interest and principal on the NCDs. Higher ratings indicate a lower risk of default and are generally associated with higher credit quality.

Why do companies issue NCDs?

Companies may issue NCDs for a variety of reasons, including to raise capital for expansion, to refinance existing debt, or to fund working capital requirements. NCDs can be a useful source of financing for companies that do not have access to bank loans or other forms of debt financing.

NCDs can also be an attractive option for companies that want to diversify their sources of funding and reduce their reliance on bank loans. By issuing NCDs, companies can tap into a larger pool of potential investors and may be able to raise capital at a lower cost compared to bank loans.

How do investors benefit from investing in NCDs?

NCDs can provide investors with a regular stream of income through the payment of interest. The interest rate on NCDs is generally higher than the interest rate on bank deposits, which can make them an attractive investment option for those looking for a higher return on their investments.

NCDs can also provide investors with the opportunity to diversify their investment portfolio and reduce their reliance on other asset classes, such as equities or bank deposits. By investing in NCDs, investors can potentially reduce their overall portfolio risk and achieve a more stable and consistent return on investment.

However, it is important for investors to understand the risks associated with NCDs, as they are not secured by any assets and carry a higher risk of default compared to other debt instruments. Investors should carefully review the credit rating and financial strength of the issuer before investing in NCDs and should be aware of the potential for loss of principal in the event of a default.

How are NCDs traded and taxed?

NCDs are typically traded on the secondary market, which is a market for the trading of securities that have already been issued. The secondary market allows investors to buy and sell NCDs after they have been issued, which can provide investors with liquidity and the ability to sell their NCDs before they mature.

NCDs are generally considered to be long-term debt instruments and are subject to different tax rules depending on the holding period. Interest earned on NCDs held for less than three years is taxed at the investor’s applicable marginal tax rate, while interest earned on NCDs held for more than three years is taxed at a lower rate of 20% with indexation benefits.

It is important for investors to understand the tax implications of investing in NCDs and to consult a financial advisor or tax professional for specific tax advice. Investors should also be aware of any applicable fees or charges associated with trading NCDs on the secondary market, as these can affect the overall return on investment.

Examples of Companies issued NCD

There are many companies that have issued Non-Convertible Debentures (NCDs) as a way to raise capital. Some examples of companies that have issued NCDs include:

  1. Tata Motors
  2. Reliance Industries
  3. Housing Development Finance Corporation (HDFC)
  4. ICICI Bank:
  5. Mahindra and Mahindra:

These are just a few examples of companies that have issued NCDs. There are many other companies in various industries that have also issued NCDs as a way to raise capital.

Conclusion

In conclusion, Non-Convertible Debentures (NCDs) are a type of debt instrument that are issued by companies to raise capital. They offer investors a fixed rate of interest and can provide a regular stream of income. NCDs can also be an attractive option for diversifying an investment portfolio and reducing reliance on other asset classes. However, it is important for investors to understand the risks associated with NCDs, including the risk of default and the tax implications of holding them. By carefully evaluating the creditworthiness and financial strength of the issuer and consulting with a financial advisor or tax professional, investors can make informed decisions about whether NCDs are a suitable investment option for them.

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Gopal Kavalireddi

Head of Stock Market Research @FYERS, Also a contributor in StockIPO, I have more than 10 years of experience in the stock market and investments. I have degree of M.S., PGPM, MDP.

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