What Are Non-Convertible Debentures (NCDs) in Shares?
Non-Convertible Debentures (NCDs) are a type of fixed-income instrument used by companies to raise capital. They are a popular financial tool for both issuers and investors, offering a range of benefits and limitations.
Definition of Non-Convertible Debentures (NCDs)
Non-Convertible Debentures (NCDs) are long-term securities issued by a company that cannot be converted into equity shares. When purchasing an NCD, investors receive a fixed interest rate over the life of the debenture and the principal amount is returned at maturity.
Key Features of Non-Convertible Debentures (NCDs)
Key features include fixed interest rates, the maturity period, and the lack of equity conversion options. NCDs also come with the possibility of secured or unsecured status, and most are rated by credit agencies.
Fixed Interest Rate
NCDs typically offer a fixed interest rate that is paid periodically, such as annually or semi-annually. This feature provides a predictable income stream for investors.
Maturity Period
The maturity period for NCDs can range from a few years to several decades. This provides flexibility for both issuers and investors in terms of investment horizons.
No Equity Conversion
Unlike convertible debentures, NCDs do not give investors the option to convert the debentures into equity shares of the issuing company. This ensures that investors retain only debt and do not gain any ownership stake in the company.
Secured vs. Unsecured NCDs
NCDs can be either secured, backed by specific assets, or unsecured, not backed by any assets. Secured NCDs are generally considered less risky than unsecured ones.
Credit Rating of NCDs
NCDs are usually rated by credit rating agencies, which helps investors assess the risk associated with the investment. These ratings provide insights into the creditworthiness of the issuing company.
Advantages of Non-Convertible Debentures (NCDs)
Steady Income: NCDs provide a predictable income stream through fixed interest payments. This makes them an attractive option for conservative investors seeking a stable return.
Lower Risk Compared to Equities: Generally, NCDs are considered lower risk compared to traditional equity investments, especially if the NCDs are secured. This makes them appealing to risk-averse investors.
Tax Benefits: In some jurisdictions, the interest earned on NCDs may be tax-exempt or subject to favorable tax treatment, which can enhance the overall yield for investors.
Disadvantages of Non-Convertible Debentures (NCDs)
No Ownership Stake: Investors in NCDs do not gain ownership in the company, which means they miss out on potential equity appreciation. This can limit their overall returns.
Interest Rate Risk: If interest rates rise, the value of existing NCDs may decline in the secondary market. This can impact the capital value of the investment.
Liquidity Risk: NCDs may not be as liquid as stocks, making it harder to sell them quickly at market value. This can be a concern for investors who need to adjust their portfolios frequently.
Conclusion
In summary, Non-Convertible Debentures (NCDs) are a suitable investment option for individuals seeking a fixed income without the risks associated with equity investments. They are particularly attractive to conservative investors who are looking for stable returns while maintaining a diversified portfolio. However, potential investors should carefully consider the advantages and disadvantages before making a decision.