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NCD

The debentures which can't be converted into shares or equities are called non-convertible debentures (NCDs). Non-convertible debentures are used as tools to raise long-term funds by companies through a public issue.

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Introduction

An NCD is a fixed-income debt paper issued by a company. In other words, the issuer agrees to pay a fixed interest on your investment. As the name suggests, these debentures cannot be converted into shares of the issuing company like convertible debentures where investors have the option of getting shares in the issuing company on conversion.

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 fulfill 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.

Any Indian company can raise money through NCDs if it has a tangible net worth of at least Rs. 4 Crore and has been sanctioned loans by banks or financial institutions which is classified as 'standard asset' and not as bad debt. 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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Benefits

Benefits of investing in NCDs

If you are looking for an investment that generates fixed income periodically, NCDs may be an ideal investment for you.

  • It offers higher rate of interest as compared to bank fixed deposits or postal   savings or similar investments avenues
  • If the NCDs are listed, you can also sell it in the secondary market before its   maturity
  • A listed NCD may also earn you capital appreciation i.e. you can sell your NCDs at a   price higher than your cost price in the market

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Things to Consider

Things to be considered before investing in NCDs

Ratings:

Rating agencies use simple alphanumeric symbols to convey credit ratings. For example, CRISIL assigns credit ratings to debt obligations on three basic scales: the long-term scale, the short-term scale, and the fixed deposit scale. AAA is the highest Credit rating by CRISIL indicating highest safety. Higher rating indicates timely servicing of debt obligations by the issuer and lower amount of credit risk.

 

Listing & Liquidity:

Debentures can be listed on a stock exchange, providing opportunities to accumulate additionally or to sell them and exit earlier than the tenure of the debenture.

 

Varying Tenures:

Redemption periods usually range from 2-15 years. One should choose the tenure on the basis of his/her own personal financial goals and risk appetite.

 

Embedded Options:

There are embedded options such as Put and Call attached to NCDs. A callable bond could be called or redeemed by the issuer before the maturity of the bond. A puttable bond works in an exactly opposite way where the investor can sell the bond to the issuer at a specified price before the maturity of the bond if the interest rates go up after the issuance and investor has higher yielding investment options available.

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Current NCDs

                                        

Please contact us for more details about the current interest rate on Non Convertible Debentures.

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