They’re backed by the company that issues them and can be traded on the secondary market. However, know that, unlike convertible bonds, there is no option to convert your NCDs into equity shares at some point during their life cycle. Unsecured NCDs are much riskier than the secured NCDs as the assets of the company do not back these. Hence, when the company defaults on its payment, the investors have no choice but to wait until they receive payments as there are no assets of the company to recover their dues. However, the interest rate offered on unsecured NCDs is higher than that of secured NCDs. NCDs offer flexible tenure ranging from 2 years to usually 20 years.

Features of Non‐Convertible Debentures, NCDs

Secured NCDs may offer higher interest rates than unsecured NCDs. Because of this reason, debentures are mainly issued by large companies to raise funds at a fixed rate of interest without any security. NCDs are vulnerable to risks related to handling business and funding. Hence, the credit rating can take a hit if the turnover is negatively impacted.

Things an investor should consider before investing in NCDs

A higher interest coverage ratio is viewed as a sign of a healthy company. Non-performing assets (NPAs) are loans or advances that are in default or are in arrears. It is important to check the provisions made by the issuing company for NPAs. Higher provisions indicate that the company is better prepared to handle NPAs. NCDs are backed by the creditworthiness of the issuer and are not backed by any collateral.

The company must keep aside at least 50% of their assets towards NPAs as this is a positive indicator of their asset quality. Insurance is not a Exchange traded product and the Member is just acting as distributor. All disputes related to the distribution activity of insurance will not have access to Exchange investor redressal forum or Arbitration mechanism. Keep track if the company is regularly being able to apportion provisions for its non-performing assets. This will also depend upon if the company is able to churn enough profits.

Non-convertible debentures are fixed-income instruments with fixed maturity date and interest payment terms. NCDs offer higher interest rates, liquidity, and tax benefits compared to convertible debentures. Investors should consider credit ratings, interest rates, and risks related to the issuing company while investing in NCDs. They are a type of debt instrument that cannot be converted into equity or stocks. NCDs have a fixed maturity date and the interest can be paid along with the principal amount either monthly, quarterly, or annually depending on the fixed tenure specified. They offer relatively higher interest rates when compared to convertible debentures.

Investors want investment options that manage liquidity and risks while offering substantial returns. Debentures are long-term financial instruments issued by a company for specified tenure with a promise to pay fixed interest to the investor. These debentures provide a fixed rate of interest also known as coupon rate as well as have a fixed maturity period. As these debentures cannot be converted to equity, the interest rate offered on these debentures is usually higher than convertible debentures.

1. They offer higher interest, minimal risk, liquidity, and tax advantage to investors compared to convertible debentures.
2. To compensate for this drawback, the interest rate offered by the company for such debentures is higher than that offered on secured NCDs.
3. A higher credit rating means that the company has the ability to fulfil credit obligations.
4. They are a type of debt instrument that cannot be converted into equity or stocks.

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Capital adequacy ratio (CAR)

They carry higher interest rates than other bonds because they are riskier to hold. NCDs are unsecured instruments, so issuers need to compensate investors for taking on this increased risk. A call option in NCD means that the company has an option to ask the investor to surrender the NCD in exchange for the principal investment. Debentures are long term financial instruments that companies issue to raise more money from investors. It is generally not backed by any collateral and thus highly depends on the creditworthiness and reputation of the issuer.

A company may choose to issue an NCD instead of a bond if it wants more flexibility regarding when it has access to the money raised through these instruments. CAs, experts and businesses can get non convertible debentures meaning GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law. CAR gauges the company’s capital and sees if the company has sufficient funds to survive potential losses.

The company will have to borrow additional funds from banks or NBFCs to counterbalance the impact. Hence, it is advised to keep a few things in mind before opting for a company NCD. NCDs offer varying payout options depending on the guidelines at the time of issue of such NCDs. The various payment options include monthly, quarterly, half-yearly, or annual interest payments. This is because the secured non-convertible debentures are secured by the company’s assets. The interest rate has an inverse relationship with the creditworthiness of the company.

If the offer document does not provide any clarity, it is better to avoid such NCDs. NCDs provide a higher rate of interest to the investors especially in cases of unsecured NCDs. The rate of interest is inversely proportional to the creditworthiness of the company. When investors take a chance by investing in a relatively lower-rated company, they expect a higher return for the higher risk taken by them.

Interest pay-outs are either monthly, quarterly, half-yearly, or annually. When the NCDs are based only on the creditworthiness of the issuer and not backed by assets, they are called unsecured NCDs. Secured NCDs are backed by real estate or other assets considered collateral for the loan made to the company (called its „issuer“). The issuer must repay these loans before repaying any other debts or interest owed to bondholders. NCD investment can be held by individuals, banking companies, primary dealers other corporate bodies registered or incorporated in India and unincorporated bodies.