What is NCD? Non-Convertible Debentures Meaning & Things To Know

Companies often need to raise funds to address their growing business requirements. Debentures act as tools to raise long-term capital through a public issue. Some debentures are convertible, i.e. they have the feature to get converted to shares after a specific time, but NCDs are debentures that are non-convertible throughout their tenure.Let’s look at what is NCD ?

NCDs are long-term financial instruments that are counted as debt for the issuer. They cannot be converted to shares or equities and have a fixed maturity date. The interest rate is also fixed and comparatively higher, that makes it an attractive investment option for investors. Upon maturity, the principal amount and the interest earned is paid back to the NCD holders.There are the following two types of NCDs:

• Secured NCDs: NCDs that are secured against the company's assets are secured NCDs. If the company fails to pay the promised amount, the claim can be made against the liquidation of company assets. These are considered safer for investors.
• Unsecured NCDs: These NCDs are unsecured, and in case the company fails to pay back the investors, they are considered only after the holders of secured NCDs have been paid their due amount. It means that they are not backed up by the company's assets. However, the interest rate on Unsecured NCDs is usually more than the Secured NCDs.

Let’s look at some of the distinguishing features of NCDs.

• Liquidity: Liquidity of investment is a crucial feature since it can help you to arrange cash in case of emergencies. Listed NCDs are highly liquid since they can be purchased and sold at any point in time in the secondary stock market.
• Interest Rates: Interest rates offered by NCDs are generally higher compared to other investment avenues such as FDs. The rates may be even higher for unsecured NCDs. Also, you have flexible payment options for interest payouts – monthly, quarterly, half-yearly, or yearly.
• Credit Rating: Credit ratings of different companies offering NCDs are provided by agencies such as CRISIL, CARE, India ratings and research, etc. These ratings reflect the creditworthiness and ability of a company to fulfil its obligations towards the creditors. A company that has consistently been able to pay the investors timely is given a higher credit rating.
• Tax Implications: Tax liabilities are levied on investors as per the tax bracket under which they fall. If you sell the NCDs within a year of purchase, STCG will apply according to your income tax slab. Similarly, if they are sold after 1 year or so, LTCG will apply at 20% with indexation.
• Tenure: NCDs are flexible when it comes to tenure and are generally offered for a minimum of 90 days and can go up to a maximum tenure of 10 years or so.

Though NCDs have a fixed interest rate that’s fairly higher, it's not free of risks completely. Below mentioned things must be kept in mind while investing in NCDs.

• Credit Rating: The foremost thing you must look for is NCDs with a higher credit rating(AA or above). Credit ratings signify the credibility and sustainability of a company. The higher the rating, the safer the investment.
• Debt Status: You must also look at the financial statements of the company before investing in NCDs. It will give insight into the company's assets, debt-equity ratio, and other statistics to help you understand the company's financial position.
• Capital Adequacy Ratio: It is one statistical indicator of whether the company has sufficient funds or assets for survival in times of crisis or losses. You must check the company’s capital adequacy ratio before investing in its NCD.
• NPA Provisions: It is a good practice for companies to keep adding to their provisions for NPA (Non-performing assets). You must check if the company is performing well enough to add funds regularly to their NPA provisions.
• Company’s ICR(Interest Coverage Ratio): The ICR figure reflects how many times a company can pay the current payable interest using its current earnings. It is relevant in understanding a company’s ability to handle its debt payments.

NCDs are fixed-income instruments, and if you are looking for options to increase your allocations to this segment, you may consider investing with NCDs. Also, if you fall in lower tax brackets(10% or 20%), investing in non-convertible debentures can be more profitable for you.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.