How Do Non-Convertible Debentures Work?
Non-Convertible Debentures (NCDs) are long-term debt instruments issued by companies to raise funds without offering the option to convert them into equity shares. Here’s how they work:
Issuance and Purpose
- Issuance: Companies issue NCDs through public issues, which are listed on stock exchanges.
- Purpose: Companies use NCDs to raise long-term funds for expansion, working capital, and debt refinancing.
Features
- Fixed Interest Rate: NCDs offer a fixed interest rate for the investment tenor, which can be paid monthly, quarterly, annually, or cumulative.
- No Conversion Option: Unlike convertible debentures, NCDs do not provide the option to convert them into equity shares at maturity.
- No Collateral: NCDs are unsecured, meaning they are not backed by any specific collateral or security. The issuer’s creditworthiness and reputation are the primary guarantees.
- Types: NCDs can be classified into two types: Secured NCDs
Investment Process
- Application: Investors can purchase NCDs during the issue period through a broker or the stock exchange where they are listed.
- KYC and Details: Investors must complete the application process and provide necessary KYC and other details.
- Trading: NCDs can be traded in the secondary market, allowing investors to buy or sell them before maturity.
Benefits
- Fixed Returns: NCDs offer a fixed rate of return, making them attractive for investors seeking predictable income.
- Low Risk: NCDs are generally less risky than equity investments since they provide a fixed rate of return.
- Liquidity: NCDs can be traded in the secondary market, providing liquidity to investors.
- Tax Benefits: Some NCDs offer tax benefits, such as higher interest rates for senior citizens or those who apply during the initial subscription period.
Considerations
- Creditworthiness: Investors should consider the creditworthiness of the issuer company, as NCDs are not backed by collateral.
- Credit Ratings: Credit ratings given by agencies help investors assess the issuer’s creditworthiness and the risk associated with the NCD.
- Financial Statements: Investors should review the issuer’s financial statements to understand their financial health and debt management capabilities.
Companies issue Non-Convertible Debentures (NCDs) for several reasons:
- Lower Interest Costs: NCDs often come with lower interest costs compared to traditional bank loans, making them an attractive financing option.
- Diversification: NCDs allow companies to diversify their sources of funding beyond equity and bank loans, reducing dependence on a single source.
- Flexible Terms: NCDs offer flexibility in terms of tenures and interest payment frequencies, allowing companies to tailor the issue to their financial needs.
- Attracting Different Investors: NCDs attract a different set of investors, including those seeking fixed-income securities and regular interest payments.
- Benefits for Investors: NCDs provide predictable and stable returns through fixed interest payments, making them particularly attractive to risk-averse investors and those seeking regular income.
These factors make NCDs a popular choice for companies seeking to raise long-term funds from the market.
Conclusion
Non-convertible debentures are a popular investment option for those seeking fixed returns with relatively lower risk. They offer a fixed interest rate and are traded in the secondary market, providing liquidity. However, investors should carefully evaluate the issuer’s creditworthiness and financial health before investing in NCDs
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