Non-Convertible Debentures (NCDs) have gained popularity in the financial landscape due to their attractive returns and stable investment nature. With their fixed interest payments, they appeal to investors looking for reliable income without excessive risk. This guide aims to clarify the world of NCDs, covering their types, safety, operational dynamics, public issuance, the secondary market, and how to invest in them effectively.
What are NCDs?
Non-Convertible Debentures are fixed-income securities issued by companies to raise funds. Unlike convertible debentures, they cannot be turned into equity shares. NCDs often provide higher interest rates compared to other debt options, which makes them an appealing choice for those seeking stable returns.
Typically, NCDs have a tenure ranging from 1 to 10 years. They provide periodic fixed interest payments, known as coupon payments. For instance, an NCD with a 9% interest rate over five years would yield significant returns compared to traditional savings accounts and fixed deposits.
What are listed NCDs?
Listed NCDs are shown in D-Mat accounts. This setup enhances transparency and liquidity. The price of listed NCDs can vary based on supply and demand dynamics.
For example, if a company's listed NCD started at INR 1,000 and experienced a surge in investor interest, the market price could rise to INR 1,200, allowing investors to benefit from price appreciation while still collecting interest.
Additionally, the regulatory framework around listed NCDs ensures that issuing companies meet strict disclosure requirements, enhancing investor confidence.
What are Unlisted NCDs? Are they safe?
Unlisted NCDs are not shown in D-Mat Accounts and are often issued directly to investors or through private placements. Although they may offer appealing interest rates, these debentures typically involve higher risks due to lack of liquidity and oversight.
Safety varies significantly based on the issuing company's financial health. For example, if you consider an unlisted NCD from a lesser-known firm offering 10% interest, thorough due diligence is essential. An investment in a reputable company like HDFC may seem safer, even if the interest rate is slightly lower at 8%. Understanding the creditworthiness of the issuing company is crucial in assessing risk.
How they work?
NCDs allow companies to borrow money from investors for a specific period in exchange for regular interest payments. Investors buy these debentures at face value, and the company promises to repay the principal amount at maturity.
The interest earned on NCDs may be taxable, often aligning with individual income tax rates. For instance, if an investor earns INR 90,000 in interest over a year, they should be prepared for taxation based on their income bracket. The certainty of returns makes NCDs an attractive option for individuals seeking reliable income streams.
Just to let you know Fixed Deposits give lesser returns and taxable based on their income tax bracket. It is better to get higher returns and pay taxes instead of getting lower returns and paying taxes at same rates.
What are Unsecured, Secured, and Senior Secured NCDs?
NCDs can be divided into three categories based on risk:
Unsecured NCDs: These do not have any collateral backing them. If the issuer defaults, investors might face a long and uncertain process to recover their investments. As a result, they usually offer higher interest rates to attract investors.
Secured NCDs: Backed by specific company assets, these offer more protection in the event of financial troubles. For instance, if a company issues secured NCDs against its real estate holdings, investors can claim those properties in case of default.
Senior Secured NCDs: This category has the highest priority concerning asset claims. They rank above other obligations, providing a superior safety net for investors. For example, in bankruptcy situations, senior secured investors might recover funds before other creditors.
What is the Public Issue of NCDs?
The Public Issue of NCDs is when companies offer these debentures to the public. During such issues, companies prominently announce crucial factors like interest rates, maturity, and the minimum investment amount.
For instance, a public issue might be launched with a 9.5% interest rate for a duration of 5 years, with a minimum investment of INR 10,000. This strategy helps companies reach a wider range of investors, facilitating financial growth while allowing investors to evaluate different options before buying.
What is the secondary market for NCDs?
The secondary market for NCDs deals with the trading of existing debentures after their initial issuance. Unlike the primary market, where NCDs are sold for the first time, the secondary market sees prices fluctuating based on market conditions.
This market provides liquidity, enabling investors to sell their holdings before maturity. For example, if an investor purchased NCDs at INR 1,000 each and the perceived value declines to INR 950 due to rising interest rates, they can decide to sell and mitigate potential losses.
What is the process for buying Public Issue NCD?
Investing in public issue NCDs usually requires the following steps:
Research: Investigate the issuing company's background, interest rates, and terms of the NCDs to make informed choices.
Application: Complete the application form from with the help of Financial Services companies like PaisaNurture
Payment: Make payments through accepted methods like online transfers or cheques.
Allotment: After the issuance closes, NCDs are allocated based on demand. If successful, you will receive a debenture certificate.
Interest Payments: Once allocated, expect regular interest payments until maturity, which can enhance your cash flow. Please choose the payout options carefully according to your requirement. Monthly, Quarterly and Yearly are the common options.
PaisaNuruture can provide creative and innovative ways to capitalise your returns on top of the coupon prices issued by the corporates.
What are all the documents needed for buying an NCD?
When looking to buy NCDs, either via a public issue or the secondary market, be prepared with the following documents:
Identity and Address Proof: Valid Aadhar card, is required for KYC compliance.
PAN Card: A PAN card is crucial for all financial activities in India, including NCD investments.
Bank Account Details: Provide your bank account information for managing interest payments and transactions.
CML Copy: It is an official document issued by your Depository Participant (DP) like CDSL / NSDL that contains all the essential details of your Demat account.
Application Form: Complete the required application form for public issues or provide relevant details in secondary market trades.
Understanding the NCD Landscape
Non-Convertible Debentures can be a valuable addition to your investment portfolio, offering diverse returns with varying risk levels. Whether you choose public issues or navigate the secondary market, grasping the concepts of NCDs empowers you to make thoughtful investment choices.
By conducting thorough research and evaluating your options carefully, you can capitalise on the benefits while managing the risks involved. Explore NCDs to potentially bolster your financial growth and secure a steady income stream.
If you would like to find a suitable NCD for you, please call us or Submit your Contact, so that we can reach out to you.
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