Be aware of the credit ratings while investing your money in this instrument. Credit rating agencies, such as Crisil/Icra rate companies based on their degree of safety regarding timely servicing of financial obligations, and credit risk.
Non-convertible debentures (NCDs) are an ideal option for investors looking for high-interest rate bearing instruments, at times when the interest rates offered by bank deposits are no longer attractive. Even in a falling interest rate scenario, NCDs let investors lock into a higher interest rate for longer periods. Non-convertible debentures are for companies looking to raise funds. Generally, NCDs offer an interest rate which is generally higher than of bank deposits or post office schemes.
However, do not worry if you haven’t invested in NCDs yet, there are many NCDs in the pipeline with attractive interest rates. For instance, Edelweiss Finance & Investments (EFIL), the NBFC arm of Edelweiss Group, issued their secured redeemable non-convertible debentures (NCDs) on January 23rd and will be paying an interest ranging from 9.7 per cent to 10.25 per cent. The issue will remain open till January 31st with an option of early closure. Also, Larsen & Toubro (L&T) the engineering giant, recently said it will raise up to Rs 1,000 crore through issuance of NCDs.
Experts suggest one should be aware of the credit ratings while investing their money in NCDs of a company. Credit rating agencies, such as Crisil/Icra rate companies based on their degree of safety regarding timely servicing of financial obligations, and credit risk.
Here is a quick guide to NCDs;
Type of NCDs
A company issues debenture when it wants to raise money from the public. Some of these are convertible debentures, meaning at the time of maturity, it can be converted to an equity share. On the other hand, non-convertible debentures cannot be converted into equity shares at the time of maturity.
There are two types of NCDs: secured NCDs, which have control over the assets of the issuing company, and the unsecured NCDs which do not get any backing from the company, in case it defaults.
Interest Rates offered
NCDs are known to offer a high rate of interest to its investors, in a high-interest rate scenario. The average interest rate has been around 8-11 per cent in the case of secured NCDs, in the last few years. Even though most NCDs offer annual and cumulative pay-out, investors can also choose from various pay-out options for interest such as monthly, quarterly, half-yearly or annually.
Depending on their term, Gains from NCDs are taxed but they are done differently from interest on bank deposits. If sold before 1-year, short term capital gains on NCDs are taxed as per the income slab of individual. If the investor sells their investments after 1 year and before maturity, it is taxable as a long-term capital gain.
Non-Convertible Debentures vs. Fixed Deposits
State Bank of India currently offers an interest of 6.1 per cent on its 5-year fixed deposit, ICICI and HDFC bank offers 6.4 per cent and 6.3 per cent respectively on their 5-year fixed deposit. NCDs, on the other hand, offers a return of 8-11 per cent, which varies depending on the lock-in period. Hence, NCDs holds the advantage over bank-deposits, as it allows investors the option to lock into better interest rates for longer periods.
Most investors, however, go in for bank fixed deposits because of the easier access and the liquidity they provide. NCDs are listed on the BSE and NSE and provide liquidity over a longer tenure.