NCD - NON CONVERTIBLE DEBENTUR

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Non-convertible debentures(NCDs) are a financial instrument that is used by companies to raise long-term capital. This is done through a public issue.

NCDs are a debt instrument with a fixed tenure and people who invest in these receive regular interest at a certain rate.

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The 8% Government of India Savings (taxable) bonds, 2003 is a bond issued by the Reserve Bank of India."

The heading is corporate bond while details mentioned GOI Saving bond that too Interest rate is 7.15% per annum.

Some debentures can be converted into shares after a certain point in time. This is done at the discretion of the owner. However, this is not possible in the case of NCDs. That’s why they are known as non-convertible.

Even though NCDs cannot be converted into shares, they offer other benefits.

What is NCD (Non Convertible Debentures)

  • High interest rates
    The rate of return on NCDs is around 11-12%. This is high compared to most investment options. For example, fixed deposits (FDs) are another popular avenue where people put their money for regular returns. However, the returns are much lower.
    There are various interest payout options including monthly, quarterly, semi-annually and annual payments. The maturity period for an NCD can be anywhere between 90 days to 20 years. This gives you the flexibility to choose between short and long tenures based on your investment goals.

  • Liquidity
    Since they are listed on the stock exchanges, NCDs are easy to withdraw. Redeeming your NCD investment may be a little tougher than selling regular stocks, but they are more liquid than bank fixed deposits.

Important terms you should know :

  • Secured and unsecured NCDs
    An NCD can either be secured or unsecured. A secured NCD is backed by the issuing company’s assets. This means that the company has to fulfil its debt obligation whatsoever. However, that’s not the case for unsecured NCDs. This makes secured NCDs safer since they have a lower default risk.

  • Ratings
    If you seek to buy NCDs, it is very important to know the rating of the debenture before you buy it. Every company that seeks to raise money through an NCD is rated by agencies such as Fitch Ratings, CRISIL, ICRA and CARE. These rating agencies rate the company based on its ability to service its debt on time. So, a lower rating means a higher credit risk.

  • Tenor
    A non convertible debenture is simply a debt instrument used by a company when it wishes to raise money from the public. The company issues a debt paper for a specific tenor. During this period, it pays a fixed rate of interest to the buyer. This could be on a monthly, quarterly or annual basis. At the end of the tenor, the money that is invested is returned back to the buyer.

  • Yield
    Yield is a financial jargon used to describe the income return earned on a security over a specific period of time. In case of NCDs, the yield on redemption has been quite attractive for buyers. This is because they generally offer higher yields when compared to even corporate FDs.

Things to consider before investing in NCDs :

  • Check company’s background
    Make sure you research the company’s history before you invest. Check if the company has raised money in the past and has successfully repaid its debts. It is a good sign if the company has met its obligations. Else, you may want to avoid investing in the company.

  • Check company’s credit rating
    The biggest draw for NCDs is the interest rate offered. However, that should not be the sole reason to invest. It is important that the high interest rate offered by the company is backed by good credit ratings. Study the credit ratings given to the company by different rating agencies such as CRISIL before you make your decision. A higher rating will suggest the company has the ability to repay its loans.