Non-Convertible Debenture or NCD is a type of debt instrument used by companies to raise funds from the market. Unlike convertible debentures, NCDs cannot be converted into equity shares at a later date. In this article, we will explore the meaning and features of NCDs in detail and NCD full form.
Introduction to NCD
A Non-Convertible Debenture is a debt instrument that is issued by companies to raise funds from the market. It is a type of bond that cannot be converted into equity shares. The interest rate offered on NCDs is generally higher than that offered on traditional fixed deposits.
Types of NCD
There are two types of NCDs – secured and unsecured. Secured NCDs are backed by assets or a charge on the assets of the company. In case the company defaults on payment, the investor can recover the amount by liquidating the assets. On the other hand, unsecured NCDs are not backed by any asset and rely solely on the creditworthiness of the company.
Features of NCD
Some of the key features of NCDs are:
- NCDs are debt instruments that offer a fixed rate of interest.
- NCDs have a fixed maturity period, which ranges from 1 year to 10 years.
- The interest on NCDs can be paid monthly, quarterly, or annually.
- NCDs can be held in demat or physical form.
- NCDs can be listed or unlisted on stock exchanges.
Advantages of NCD
Some of the advantages of investing in NCDs are:
- Higher returns: NCDs offer higher interest rates compared to traditional fixed deposits.
- Low risk: Secured NCDs are backed by assets, which reduces the risk of default.
- Diversification: Investing in NCDs provides diversification to the portfolio.
- Liquidity: NCDs can be easily bought and sold on stock exchanges.
Disadvantages of NCD
Some of the disadvantages of investing in NCDs are:
- Low liquidity: Unlisted NCDs can be difficult to sell in the secondary market.
- Credit risk: Unsecured NCDs rely solely on the creditworthiness of the company.
- Market risk: The value of NCDs can fluctuate depending on market conditions.
Differences between NCD and convertible debentures
The key difference between NCDs and convertible debentures is that NCDs cannot be converted into equity shares, whereas convertible debentures can be converted into equity shares at a later date.
NCD vs. Fixed Deposits
The major difference between NCDs and fixed deposits is that NCDs offer higher interest rates compared to fixed deposits. However, fixed deposits are generally considered to be safer as they are backed by the government.
Factors to consider before investing in NCD
Before investing in NCDs, investors should consider the following factors:
- Credit rating of the company
- Type of NCD – secured or unsecured
- Interest rate offered
- Maturity period
- Liquidity of the NCD
Taxation on NCD
The interest earned on NCDs is taxable as per the investor’s income tax slab. However, if the NCD is held until maturity, the interest earned is taxed at the rate of 10% without indexation or 20% with indexation, whichever is lower.
Top companies issuing NCDs
Several top companies in India issue NCDs to raise funds. Some of the popular ones include:
- Tata Capital
- Shriram Transport Finance
- L&T Finance
- Mahindra & Mahindra Financial Services
How to invest in NCD
Investors can invest in NCDs by directly buying them from the company or through a broker. NCDs can be held in demat or physical form. Investors can also buy and sell NCDs on stock exchanges.
Risks associated with NCD
Investing in NCDs comes with its own set of risks. Some of the major risks are:
- Credit risk: Unsecured NCDs rely solely on the creditworthiness of the company. If the company defaults on payment, the investor may lose their investment.
- Interest rate risk: The interest rate on NCDs is fixed at the time of issue. If the market interest rates increase, the value of the NCD may decrease.
- Liquidity risk: Unlisted NCDs can be difficult to sell in the secondary market.
Non-Convertible Debentures are a popular debt instrument used by companies to raise funds. They offer higher returns compared to traditional fixed deposits and provide diversification to the portfolio. However, investors should carefully consider the risks associated with NCDs before investing.
- What is the minimum investment amount for NCDs?
- The minimum investment amount for NCDs varies from company to company. Generally, it ranges from Rs. 1,000 to Rs. 10,000.
- Can NRIs invest in NCDs?
- Yes, NRIs can invest in NCDs, subject to certain conditions.
- Are NCDs a safe investment option?
- Secured NCDs are considered to be relatively safer as they are backed by assets. However, investing in NCDs comes with its own set of risks.
- What is the maturity period of NCDs?
- The maturity period of NCDs ranges from 1 year to 10 years, depending on the company issuing the NCD.
- Can NCDs be converted into equity shares?
- No, NCDs cannot be converted into equity shares. They are purely debt instruments.