Non-Convertible Debentures : Types, Features And Examples

Companies can raise money using debentures without reducing ownership. Since debenture investment generates debt, investors who purchase them become the company’s creditors and receive periodic interest payments, known as coupons.

The two main types of debentures are Convertible and Non-Convertible Debentures (NCDs). NCD investments offer stable returns and help achieve effective portfolio diversification.

Non-Convertible Debentures: An Overview

While convertible debentures are debt securities that can be converted into equity shares, non-convertible debentures (NCDs) cannot be exchanged for equity.  

NCDs remain fixed-income instruments throughout their tenure, offering periodic interest payments that can be made monthly, quarterly, or annually. They also come with a predetermined maturity date.  

Categories Of Non-Convertible Debentures

Listed below are the two categories of NCD.

1. Secured Non-Convertible Debentures

Secured NCDs are deemed safer because the company's assets support their issuing. Investors may retrieve their money if the business doesn't make payments on schedule by selling off the company's assets. NCD interest rate in this case is less.

2. Unsecured Non-Convertible Debentures

Since unsecured NCDs are not backed by the issuer’s assets, they carry a higher level of risk compared to secured NCDs. To compensate for this added risk, unsecured NCDs typically offer higher interest rates than their secured counterparts.

Examples Of Non-Convertible Debentures

Here are the latest non-convertible debentures for the financial year 2024-25

Source: SEBI¹

What Makes NCD Unique ? 

The characteristics of the non-convertible debentures enhance investor understanding of the instrument. Attributes can help investors decide if they should invest in NCDs.

1. Rated Securities

Credit rating agencies such as CRISIL, CARE, and others evaluate non-convertible debentures (NCDs). These ratings play a crucial role in determining an NCD’s reliability. A higher credit rating indicates the company’s strong ability to meet its financial obligations, making it a safer investment option.

A poor credit rating indicates that the business is exposed to significant credit risks. The rating agencies provide a lower grade to any issuing firm that defaults on payments. 

2. Non-Convertible Debentures Interest Rate

If investors hold non-convertible debentures (NCDs) until maturity, they can earn a substantial interest rate. NCDs offer flexibility, allowing interest payments in installments or as a cumulative payout at maturity. This makes them an attractive option for passive income generation. Additionally, unsecured NCDs may offer higher interest rates to compensate for the increased risk.

3. Issuance Of Non-Convertible Debentures

NCDs are offered by businesses through open-market public offerings, allowing investors to purchase them within a specified time. On the stock market, non-convertible debentures are traded.

4. Exchangeable securities

Non-convertible debentures are actively traded on the stock market, allowing investors the flexibility to buy and sell them as needed. This enhances market liquidity and enables portfolio diversification.

5. Companies with good rating

While NCD ratings range from AAA to D, they are typically issued by companies with investment-grade credit ratings. As per SEBI guidelines, an NCD should have an investment grade rating from at least one Credit Rating Agency².

How To Invest In NCDs?

Now that the concept of non-convertible debentures is discussed, let us now move on to the steps involved in the purchase of NCDs.

Listed below are the actions that investors must follow in order to make NCD investments.

1. Non-convertible debentures are first launched in the primary market.
2. Similar to the shares, after the primary market operations, non-convertible debentures are openly traded in the secondary market. 
3. They get listed on stock exchanges like NSE and BSE, where they are exchangeable. 
4. Investors can invest in NCDs through brokerage platforms or banks.

Although the mechanism of investment in NCD seems easy, there are some important considerations before investing.

Conclusion

Non-convertible debentures provide an excellent opportunity to diversify a portfolio while generating substantial interest. Their monthly or quarterly payout structure makes them an attractive option for passive income generation. However, prudent financial planning is essential to make the best of this investment avenue. Credit rating agencies and financial statements can help investors make prudent decisions.

Log in to Grip Invest and unlock a range of financial assets including non-convertible debentures that enable portfolio diversification and capital appreciation.

Frequently Asked Questions On Types Of Non-Convertible Debentures

1. Is NCD better than FD?

The profitability of any asset depends on the nature of an individual. While the return generated through NCD is much higher compared to FD, fixed deposits are one of the safest investment avenues. The profitability and suitability depend on the risk-taking capacity and goal of investors.

2. What is the interest rate on non-convertible debentures?

The return on NCD is higher than convertible debentures because they are not listed. The higher yield results from the fact that they are not backed by financial assets. However, assets rated AA or higher are often safe to invest. Due diligence is key.

3. Is NCD tax-free?

Long-term capital gains on the sale of an NCD (listed security) are taxed at reduced rates under section 112 of the IT Act, whereas short-term capital gains would be taxed at regular rates.

References

1. SEBI, accessed from: https://www.sebi.gov.in/statistics/corporate-bonds/publicissuedata.html

2. SEBI, accessed from: https://www.sebi.gov.in/sebi_data/commondocs/amend_h.html
 

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