Non-Convertible Debentures (NCDs)

The NCD full form is Non-Convertible Debentures, which are fixed-income instruments issued by reputed companies to raise long-term capital. These debentures offer higher interest rates compared to convertible ones. Eligible investors in India include individuals, banks, primary dealers, and corporate or unincorporated bodies.

Below are the key features of NCDs:

1. Credit rating
   Credit rating agencies such as CRISIL, CARE, etc., rank companies based on their creditworthiness. A higher credit rating means that the company has the ability to fulfil credit obligations. However, a 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 a lesser ranking.
2. Interest
   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. Interest payouts are either monthly, quarterly, half-yearly, or annually. NCDs do offer a cumulative payout option as well. Moreover, unsecured NCDs can offer a higher interest rate.
3. Issuance
   NCDs are made available to investors through open-market public issues conducted by companies within defined periods. Interested investors can purchase these debentures during the specified timeframe, contributing to the company's capital-raising efforts.
4. Tradable securities
   Non-Convertible Debentures are actively traded in the stock market. This tradability provides investors with the flexibility to buy or sell NCDs in the secondary market, enhancing market liquidity and allowing investors to manage their portfolios dynamically.

Credit rating
Given that NCDs lack collateral backing, only companies with robust credit ratings can issue them. These credit ratings, regularly assessed by credit rating agencies, serve as a crucial determinant of an issuer's ability to fulfill credit obligations. This underscores the importance of creditworthiness in the issuance and investment in non-convertible debentures.

1. Fixed returns:
   NCDs offer predictable returns, making them suitable for investors seeking stability.
2. Diversification:
   By investing in NCDs issued by different companies and industries, investors can reduce risk through diversification.
3. Higher returns:
   NCDs generally provide higher returns compared to traditional fixed-income instruments like bank fixed deposits.
4. Tax benefits:
   Interest earned on NCDs is taxed at a lower rate of 10%, making them a tax-efficient investment choice.
5. Liquidity:
   The tradability of NCDs on stock exchanges ensures liquidity, allowing investors to exit their investments if needed.
6. Credit rating insight:
   Credit ratings help investors assess the creditworthiness of issuers and manage risks effectively.

Tenure flexibility:
NCDs are available in various tenures, enabling investors to align investments with their financial goals.