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What are NCDs

6 Mins 21 Feb 2022 0 COMMENT

Introduction

Non-Convertible Debentures, commonly known as NCDs, are financial instruments a company issues to investors to raise money. These instruments have a fixed maturity date. Individuals, banking companies, and corporate bodies registered or incorporated in or outside India can invest in NCDs. Unlike Convertible Debentures, NCDs cannot be converted into shares when they mature.

Key features

High liquidity: NCDs are highly liquid, and you can readily encash them during any emergency through sale in the secondary market.

Higher interest rate: Most NCDs provide returns that are higher than Fixed Deposits.

Different pay-out and maturity options:  Different NCDs offer other interest payment options monthly, quarterly, annually, or semi-annually. Similarly, the maturity of NCDs also varies from 90 days to 20 years. This makes it easier for investors to choose something that suits their investment goals and risk profile.

Types of Non-Convertible Debentures

NCDs are classified into two categories:

Unsecured NCDs: No collaterals back such NCDs, which makes them riskier than secured ones. However, they offer higher interest rates. Owing to no collateral, the investors rely on the credit rating given by the rating agencies to assess the creditworthiness of the issuing company.

Secured NCDs: These NCDs are backed by the assets of the issuing company. These instruments are considered safer than unsecured ones. If there is any default by the issuing company in making payments, investors can liquidate the assets to recover their dues.

How are Non-Convertible Debentures taxed?

They get taxed at the slab rate. If you fall in the higher tax bracket, then your post-tax returns may be substantially less. Taking the tax return into account is extremely important as those with no taxable income earn better returns through NCDs than others.

Put and Call Options in NCDs

You may notice that the offer document specifies that the NCDs come with a Call or Put Option.  If the NCD has a Call Option, the issuing company can redeem the NCDs ahead of their maturity period instead of full payment of the outstanding interest and principal amount. This flexibility is helpful for the issuing company when the interest rates go down.

They can return the money to the investors and borrow money from the market at lower rates by exercising the option. When the investor exercises the chance to surrender or redeem the NCDs in exchange for full payment of the outstanding principal and interest amount, it is called a Put Option.

How to buy NCDs?

If you want to invest in NCDs, you must open a Demat Account with your stockbroker. You can purchase NCDs through the broker or the issuing company. However, make sure to read the offer document carefully so that you understand the fine print better. Always pick Non-Convertible Debentures that are aligned with your goals and investment horizon.

Now that you have got a complete idea about what is NCD, it is time to start investing.

Disclaimer:

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  I-Sec is acting as a distributor to solicit bond and debentures related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.