Understanding NCDs (Non-Convertible Debentures): Types and Key Information

Non-Convertible Debentures (NCDs) are a type of debt instrument issued by companies to raise capital.

Non-Convertible Debentures (NCDs) are a type of debt instrument issued by companies to raise capital. When a company issues an NCD, it is borrowing money from investors with a promise to pay back the principal along with interest at a later date. NCDs cannot be converted into equity shares of the company, hence the name "non-convertible."

Key Features of NCDs

• Fixed Interest Rate: NCDs typically offer a fixed rate of interest that is paid to the investor over a specified period, which could range from a few years to a decade.
• Repayment Period: At the end of the agreed term, the principal amount is repaid to the investor. NCDs usually have a fixed maturity date.
• Security: NCDs may or may not be secured. Secured NCDs are backed by the company’s assets, providing more security to the investor. Unsecured NCDs, on the other hand, are not backed by any collateral, making them riskier.

Types of NCDs

Secured NCDs: These NCDs are backed by the company’s assets (like property or equipment). In case the company defaults, the investors have the right to claim the company’s assets to recover their investment. Secured NCDs tend to offer lower interest rates due to the added security.

Unsecured NCDs: These NCDs are not backed by any physical assets. They depend on the company’s ability to repay the loan. As these are riskier than secured NCDs, they often offer higher interest rates to attract investors.

Fixed Rate NCDs: These NCDs offer a fixed rate of interest throughout the tenure. The investor receives the same interest payout regularly, regardless of market conditions.

Floating Rate NCDs: Unlike fixed-rate NCDs, the interest rate on floating-rate NCDs is tied to a benchmark, like the RBI’s repo rate. The interest payouts fluctuate based on changes in the benchmark rate, making them less predictable than fixed-rate NCDs.

Why Invest in NCDs?

Investors looking for regular income streams often invest in NCDs due to their fixed-interest payouts. They can also be a safer investment option compared to stocks because they offer a fixed return. However, like all investments, NCDs come with risks, especially unsecured NCDs that depend on the company’s financial health.

Conclusion

NCDs can be a good option for investors looking for a steady income with relatively lower risk compared to stocks. Understanding the types of NCDs, along with their features, can help investors make informed decisions. It’s important to assess the company’s creditworthiness before investing in NCDs, especially unsecured ones, to minimize potential risks.