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NON CONVERTIBLE DEBENTURE

NON CONVERTIBLE DEBENTURE


Debt Bet For High Returns

Investors are always on the prowl for good investment opportunities and Indica Investments help them in spotting them.

NCDs might be the answer to their quest for the investment instrument that offers high returns with moderate risk while giving them the flexibility of choosing between short and long tenures.


WHAT ARE NCDs

Whenever a company wants to raise money from the public it issues a debt paper for a specified tenure where it pays a fixed interest on the investment. This paper is known as a debenture. Some of the debentures are termed as convertible debentures since they can be converted into equity share on maturity.


A Non - Convertible debenture or NCD do not have the option of conversion into shares and on maturity the principal amount along with accumulated interest is paid to the holder of the instrument.

There are two types of NCDs-secured and unsecured.



A secured NCD is backed by the assets of the company and if it fails to pay the obligation, the investor holding the debenture can claim it through liquidation of these assets. Contrary to this there is no backing in unsecured NCDs if company defaults. However, any company seeking to raise money through NCD has to get its issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. A higher ratings (e.g. CRISIL AAA or AA-Stable) means the issuer has the ability to service its debt on time and carries lower default risk. A lower rating signifies a higher credit risk.

An NCD can be both secured as well as unsecured. For secured debentures, which are backed by assets, in case the issuer is not able to fulfil its obligation, the assets are liquidated to repay the investors holding the debentures.

Secured NCDs offer lower interest rates compared with unsecured ones. If you want a regular income from NCDs, you can pick those that pay interest on a monthly, quarterly or annual basis. If you just want to grow your wealth, you can opt for cumulative option where the interest earned is reinvested and paid at maturity.


Mandatory Rating

Companies seeking to raise money through NCDs have to get their issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. NCDs with higher ratings are safer as this means the issuer has the ability to service its debt on time and carries lower default risk.



Listing on the bourses

NCDs are also listed on bourses. This allows investors to liquidate the bonds even before maturity. However, there is no active market for NCDs on the wholesale debt market segment of the stock exchanges and their liquidity is low.

Risk Involved

NCDs have some inherent risk associated which an investor has to take into consideration before making any investment decision. The biggest risk is the credit risk. The company can default on the future payment and if it is unsecured NCD, an investor does not have any recourse. Most companies get rating through agencies like CRISIL or CARE based on various parameters which investors can check for credibility. A rating of AAA by CRISIL is considered to be highest on safety. The second risk is the liquidity risk. Even if NCD gets listed, low volumes (case of low rated NCDs) can deprive investors of any opportunity in exiting prematurely.


TAXATION

1-Interest earned on NCDs after maturity taxed as regular income

2- Gain from selling NCDs within 3 years taxed as short-term capital gains.

3- Return from NCDs sold after 3 years but before maturity taxed as long-term capital gain.

4- Capital gains taxed at the rate of 10% without indexation of the cost of acquisition and at 20% with indexation, which factors in inflation





Parameters

i) Study the Debt Equity multiple of the issuing company.

ii) Past track record of the debt repayment obligations.


iii) Related and unrelated diversifications.



iv) Check rating of companies.



v) Company’s financial health



vi) End uses of funds


NCD Vs BANK DEPOSIT

NCD is better than a bank fixed deposit because the interest differential is quite significant which comes at just a slightly higher risk. The risk-return ratio is in favour of NCDs

Currently, bank fixed deposits are offering an interest of 8-9% for a tenure of one to five years. In contrast, the recently concluded Shriram Transport NCD offered 11.6% for five years and 11.35% for three years to individuals.