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NCD (Non-Convertible Debenture) is a long-term fixed-income instrument issued by companies to raise funds from investors.
Content:
NCD is the abbreviation for Non-Convertible Debenture. A debenture is a long-term fixed-income instrument issued by companies to raise funds from investors.
Since it is non-convertible security, it cannot be converted into shares or other forms of security.
Non-convertible debentures, popularly known as NCDs, are long-term debt securities issued by corporations at a specific interest rate. NCDs are issued with a long-term maturity of 2 to 10 years. Interest is paid at different intervals depending on the investor's preference: monthly, quarterly, semi-annually, annually, or at maturity. Each issuer may have different maturities, interest rates and intervals.
There are mainly two types of NCDs, secured and unsecured NCDs.
Secured NCDs are debt securities that are backed by collateral. These types of debt securities provide a certain guarantee of repayment.
Investments in collateralized NCDs are safer and more reliable because these NCDs are backed by assets of the company. If the company defaults, the investor money can be recovered from liquidation of assets. The company is obligated to sell the assets that serve as collateral for the NCDs and pay out the investors.
The interest rates for secured NCDs are not as high as those for unsecured NCDs.
Unsecured NCDs are unsecured debt instruments. As the name "unsecured" implies, these NCDs have comparatively higher risk as they are not backed or secured by assets/collateral.
Unsecured NCDs are based on the issuer’s creditworthiness and are not backed by any assets or collateral.
Unsecured debt instruments offer a higher return than secured NCDs.
Generally, companies issue secured redeemable NCDs. You can read about the type of NCD issued by the company in the offering documents. The investors cannot withdraw from NCD before maturity. However, they have the option to exit by selling NCDs in the secondary market.
NCD has below characteristics:
NCD is issued for a longer tenure ranging from 2 to 10 years. Once invested you cannot withdraw from the NCD till maturity. To exit you can sell the NCD in the stock market provided the NCD is listed and you find a match for your trade.
NCD is a long-term investment security that comes with different tenor options. The investor can choose to invest for the desired tenure as per their investment goal.
The corporates generally issue NCDs that are secured by a charge on the assets of the Company. Thus, there is low risk in such investments and are considered safe. In case of liquidation of the company, the investors can claim their money against the sale value of such assets.
Like Fixed Deposits (FD) NCD offers interest to the investors at a fixed rate for a fixed tenor. The rates offered on NCD are higher than the FD rates. The interest details are mentioned in the offering document of the NCD issuing company.
NCD offers investors with different interest payout options like monthly, quarterly, six-monthly, annually or at maturity. The investors can choose the option that best suits their needs.
Listed NCDs are part of secondary market/stock exchanges. Investors can trade in NCD similar to shares
The interest from NCD is taxable as income from other sources and taxed as per the investor tax slab. Any gains as a part of NCD trading are subject to short-term (as per tax slab) and long terms based (10% without indexation and 20% with indexation) on the holding period.
The interest on the NCD gets directly credited to the bank account given at the time of NCD application. The credit happens automatically as per the chosen option for interest payout.
NCD offers various advantages to investors as stated below:
NCDs offer higher interest rates as compared to returns on fixed deposits, post office schemes or other traditional securities.
NCD is a long-term investment that gives investors a good return on the invested amount if kept until maturity. Investors receive interest and the principal amount at the maturity of the NCD.
Although NCDs cannot be withdrawn at any time by investors, listed NCDs can be traded on the stock exchange platform in an open market just like equity shares.
NCDs offer investors a regular fixed income when opting for monthly or quarterly payout options. The NCDs need to be held till maturity to receive this fixed income.
The interest earned through NCD is not subject to TDS as per Section 193 of the Income Tax Act. Though TDS is not applicable, interest on NCD is taxable as per the investor tax slab.
NCDs being a long-term investment tool, you cannot withdraw from it before maturity. However, listed NCDs provide an option to exit by selling them on the secondary market.
The biggest disadvantage of NCDs is that the returns do not take inflation into account. NCD offers a fixed rate of interest for the entire chosen tenor. The post-inflation returns from NCDs may not be as attractive as compared to other dynamic investment options available in the market.
Compared to other debt investment options like debt mutual funds, post-tax returns from NCD could be significantly lower. Investing in NCDs has tax implications because the interest in NCDs is as per the income tax slabs.
If investors trade the NCD in the secondary market before one year, a short-term capital gain tax gets levied. After the first year, a long-term capital gain tax is imposed at 20 per cent. Compared to this, the gains on debt mutual funds get taxed at a flat rate of 15%.
The minimum investment amount in NCD is generally Rs 10,000. This is higher as compared to investment in shares, mutual funds, and FDs where you can start your investment with a minimum of Rs 500 as well.
An investor should consider below factors before investing in NCDs:
Each NCD issue is rated by certified and SEBI-registered credit rating agencies (CRA). The CRA provide an unbiased and independent rating based on their analysis of the company’s financial and business risks, its ability to pay timely interest, company management, etc. The ratings provided by the CRA provide an indication of the safety of your invested funds.
An investor should check the interest rates offered by the issuing company and compare with other available options and the time horizon.
An investor should check the type of NCD offered by the company. Generally, a company offers secured redeemable debentures. However, it is important to verify the NCD type in the offer documents. The unsecured debentures are a little riskier than secured debentures.
It is important to understand one’s financial goal before any investments. NCD is a long-term investment security. Thus, one needs to assess the holding capacity to get the expected returns.
Investors can exit from the NCD by selling them on the exchange floor. However, the liquidity is not as high as in the case of equity shares. Thus, one needs to understand that one may need to wait to exit at the desired price.
The capital adequacy ratio (CAR) indicates the position of a company to withstand losses and risks. It reflects the solvency of the company. NCDs of the companies with higher CAR are generally better and safer.
NCDs can be issued by public or private limited companies either by way of the public offer by inviting the general public to subscribe to the issue known as NCD IPO or through private placement. In private placement, the offer is made to a selected group of investors.
The issuance and listing of NCD are regulated by the Companies Act and SEBI NCS Regulations.
The NCD full form in share market is Non Convertible Debentures.
Non-convertible debentures are the fixed income debt securities issued by the companies for a long term. The issuer offers to pay interest at a specific rate at regular intervals to the NCD holders. These securities cannot be converted to any other form of security as they are non convertible in nature.
The investors can invest in NCD either by applying in IPO or trading listed NCD through stock exchanges.
NCDs are good investment as they offer various benefits to the investors are mentioned below :
NCDs are comparatively safer than equities and mutual funds.
NCDs are fixed income securities and are not impacted by market movements.
Secured non-convertible debentures are backed by the company's assets, which makes them low risk. Investors must review the important factors before investing in NCDs. NCDs are safer as they cannot be converted into equity and have security attached that investors will receive interest to some extent if the issuer fails.
NCDs can be issued by private companies, public companies and government organizations.
The issuance of NCDs can be done either as a private placement or public offering. In private placement, a specific set of investors are invited to apply for the issue. In public offering, the issue is offered to the general public just as done in IPO (initial public offering), hence such an issue is known as NCD IPO.
Non-Convertible debentures are long-term investment securities. These debentures cannot be converted into equity, and thus do not have any equity element attached to them.
A company solicits a loan from the general public or investors in an open market through issuance of non-convertible debentures. The company offers the investor a certain interest rate in exchange for their money, and upon maturity, they receive their entire investment back. The maturity period of these securities ranges from 1 year to 20 years.
NCD is good for long-term investments.
NCDs have a fixed tenure. The companies pay a fixed interest amount to the investors at regular intervals as chosen by the investor. On maturity, the company returns the entire principal amount to the investor. NCDs give expected returns when held till maturity. If an investor sells the NCD before the maturity period, the investor stops receiving the interest and thus the returns may not be as expected.
Compared to convertible debentures or Fixed Deposits, NCDs provide superior returns, liquidity, low risk, and tax advantages to investors.
Yes, NCD is a fixed-income instrument that can be traded on the stock market like equity.
You can buy and sell listed NCDs online through your broker platform. The liquidity is less in case of NCD trading, thus getting desired price at desired time is not guaranteed.
NCD investments are comparatively safer than other securities as they are rated by credit rating agencies and are low risk instruments. NCDs offer investors above-average returns, liquidity, low risk, and tax benefits.
The companies offer interest to the investors for the amount invested. Irrespective of the market sentiments, the investors receive fixed amounts at regular intervals or at maturity. On maturity, the investors receive the principal amount. Thus, the investors are assured to receive more than the invested amount unlike Equity wherein the share prices can drop or rise.
However, before investing in NCDs, investors must consider the NCDs' rating, the company's financial performance, risk factors, interest rate, effective yield, and maturity information.
Yes, NCD interest is taxable.
The interest earned from NCDs is added to the total income of the investor and taxed as per their tax slab.
NCD stands for Non-Convertible Debentures.
NCDs are long-term fixed income investment securities. They offer interest at a predetermined rate to the investors. The companies offer NCDs for different tenure. Each tenure has a different rate of interest attached to it. The investors can choose any of the options as desired.
NCD cannot be withdrawn before maturity. However, if the NCD is listed the investors can sell off their security before maturity.
An investor should look for below factors that can help decide the NCD that is best for them based on their financial goals.
Investors can track the list of upcoming NCDs issues for more details on each issue with its review and live subscriptions status.
Yes, one can sell before maturity provided the NCD is listed on the secondary market.
NCD cannot be redeemed or withdrawn before maturity but can be sold to make an early exit. Listed NCDs can be bought or sold on stock exchanges.
Yes, NCDs can be transferred to another person by selling it in the secondary market.
The secondary market is where investors buy and sell securities including listed NCDs. Once an investor sells NCD, he no longer remains the owner of that NCD and the beneficiary rights get transferred to the seller.
An NCD is a long-term investment. Non-convertible investments function like time deposits. The investment has a fixed interest rate, a maturity of 1-15 years, and a yield to maturity. The investor purchases the NCD, and at maturity, the issuer repays the principal with intermittent interest payments.
Secured nonconvertible debt securities are comparatively safer than unsecured NCDs. In the case of Secured NCDs, the Company creates adequate security over the assets for the benefit of the NCD Holders to provide 100% coverage of the Secured NCDs (together with interest due thereon) throughout the term of the Debentures.
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