What are non-convertible debentures or NCDs ?

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Updated: Saturday, September 7, 2013, 14:20 [IST]
 
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What are non-convertible debentures or NCDs ?

Debentures are medium-term or long-term financial instruments issued by corporations to raise funds. Typically, there are two type of debentures, convertible and non-convertible debentures. Read about How to buy NCDs?

Convertible Debentures: Such debentures are available with a provision for conversion into company stocks or shares after some specified time frame.

Non-convertible Debentures or NCDs : NCDs do not feature the provision for conversion into company stocks or equity or pay interest. Some of the recently issued NCDs include those from Muthoot Finance, SREI, Shriram Transport Finance and Manappuram Finance.

Advantages

1. Offer Higher Effective Yield:

In comparison to bank fixed deposits, NCDs offer higher effective yield in the range of 10-14% annually for different maturity terms. Also, interest rate offered on NCDs is more than that offered on convertible debentures as they lack the facility to be exchanged with shares of the corporation.

2. Safer than Equity :

NCDs offer fixed returns in contrast to equity that is highly volatile. In case of liquidation of the company, claim of the NCD holder is held high in comparison to equity holders i.e. the company gives priority to the obligation towards NCD holders.
Safety and security of NCDs with respect to its ability to pay interest and principal amount at maturity is backed by different credit rating agencies.

NCDs are also deemed safer in comparison to company fixed deposits.

3. No TDS on interest income :

NCDs do not attract TDS on interest earned. However, interest income on NCDs forms  the part of the total income while filing income tax returns.

4. Liquid Investments:

As NCDs are listed on the stock exchanges they offer liquidity which is often very low on account of low volume of trade for these debt instruments.

Disadvantages

1. Non-convertible to equity:

Unlike, convertible debentures that on the discretion of the owner of the debenture can be converted into equity of the company after some specified time frame, NCDs cannot be exchanged with equity.

2. Less safe than Bank fixed deposits:

Unsecured NCDs that are not secured by underlying assets of the company can default on principal and interest payment in case of losses. However, in case of secured NCDs even if the company makes losses, its obligation towards NCD holders is discharged by liquidating its underlying assets.

3. Not suitable for Risk-averse investors: NCDs are not suitable for risk-averse investors on the look out for higher returns due to an inherent element of risk.

GoodReturns.in

Topics: debentures, ncds, debt
Story first published:  Saturday, September 7, 2013, 13:17 [IST]
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