NCD
What are NCD :
Whenever a company wants to raise money from the public it issues a debt paper for a specified tenure where it pays a fixed interest on the investment. This paper is known as a debenture. Some of the debentures are termed as convertible debentures since they can be converted into equity share on maturity. A Non - Convertible debenture or NCD do not have the option of conversion into shares and on maturity the principal amount along with accumulated interest is paid to the holder of the instrument.
There are two types of NCDs-secured and unsecured. A secured NCD is backed by the assets of the company and if it fails to pay the obligation, the investor holding the debenture can claim it through liquidation of these assets. Contrary to this there is no backing in unsecured NCDs if company defaults. Independent rating agencies like ICRA, CRISIL,CARE, FITCH rate the companies as AA or A+.
We Always advise our investors to invest in companies with higher rating and not go solely by the interest rates offered on the debentures.
Following are the points which one should keep in mind before investing in Non- convertible debentures:-
- Liquidity : Fixed Deposits by banks can be liquidated at any time for a small penalty. However, this may not be possible when it comes to debentures. Nevertheless, from a returns perspective, debentures are better compared to other fixed income instruments.
- Risk : Risks are high in case of non-convertible debentures as companies might face loss at any time. Further, unsecured Non-Convertible Debentures have no underlying assets as security that is the reason why unsecured Non-Convertible Debentures give more returns than secured ones. Consider the rating of the issuer and the issue itself before investing, especially if you do not have much knowledge about the business model of the company issuing the debentures.
- Tax : From income tax point of view, rate of interest on debentures is income from other sources, which is clubbed under ‘Income from other sources’ head and charged at slab rate applicable to an individual. If an investor is selling this debenture before maturity, capital gains tax is attracted on the premium.
- Traded in Stock Exchange : Non convertible debentures are listed on stock exchanges and can be traded as shares. However if the market interest rate is higher than the coupon rate then the debenture must be sold at a lower price and vice versa if the market rate is higher than the coupon rate. These instruments can also be converted into cash.
- Maturity : Maturity of debentures varies from one issue to another. As per RBI stipulations, minimum time for maturity must not be less than 90 days and maximum can be 20 years. You can invest either in a short term debenture or one with a long maturity period as per your preference, in line with your financial goals.
- History Of Company : As mentioned earlier, it is advisable to base your purchase decision based on ratings given by independent agencies. However, you must do your own research on the company’s health before investing in its issue. If the company has defaulted in payment earlier it is not advisable to invest in its offering.
