What are Non-Convertible Debentures (NCD)?
Non-Convertible Debentures (NCD)
Non-convertible debentures (NCDs) are a financial instrument that is used by companies to raise long-term capital. This is done through a public issue. It falls under the debt category, with a fixed tenure and people who invest in these receive regular interest at a certain rate.
NCD cannot be converted into equity or stocks. It has a fixed maturity date and the interest which can be paid along with the principal amount depending on the fixed tenure specified. The tenure may be either monthly, quarterly, or annually. They benefit investors with their supreme returns, liquidity, low risk and tax benefits when compared to that of convertible debentures.
There are companies which have raised good money through Non-Convertible Debentures (NCDs) in recent years. Muthoot finance came out with its 3000 crore NCD issue on 9th April 2018 and received an overwhelming response from high net worth individuals and retail investors.
Features of NCDs
Taxation
NCDs has tax implications which depend on the tax bracket the investor falls under. If NCDs are sold within a year or lesser STCG will be applicable as per the income tax slab rate. If the NCDs are sold after a year or more or before the maturity date, LTCG will be applicable at 20% with indexation.
Credit rating
Companies are ranked by credit rating agencies such as CRISIL, CARE and it plays an important role in determining the potential of a company. Higher the credit rating higher the company’s ability to fulfil credit obligations. However, low credit rating means that the company has high credit risks involved. If any issuing company fails to make payments then the rating agencies give them lesser ranking.
Interest
NCDs offer high interests that range from 8% to 12%. As said earlier Interest pay-outs are either monthly, quarterly, half-yearly or annually. NCDs do offer cumulative payout option, as well.
Things to consider before investing in NCDs:
Check the company’s background
Make sure you research the company’s history before you invest. Check if the company has raised money in the past and has successfully repaid its debts. It is a good sign if the company has met its obligations. Else, you may want to avoid investing in the company.
Check the company’s credit rating
The biggest draw for NCDs is the interest rate offered. However, that should not be the sole reason to invest. It is important that the high-interest rate offered by the company is backed by good credit ratings. Study the credit ratings given to the company by different rating agencies such as CRISIL before you make your decision. A higher rating will suggest the company has the ability to repay its loans.
