What Is a Non-Convertible Debenture (NCD)?

Non-Convertible Debentures (NCDs) are debt instruments issued by companies to raise long-term capital. This means when you invest in an NCD, you are lending money to the company issuing it. In return, the company promises to pay you a fixed interest rate (also known as the coupon rate) and repay the principal amount on a specified maturity date.

Key Features

• Non-Convertible: Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company at any time. This is a key feature, as it means your investment remains a debt and does not give you ownership rights.

• Interest Rates: NCDs usually offer higher interest rates compared to regular bank fixed deposits, making them an attractive investment for those seeking higher returns.

• Secured and Unsecured: NCDs can be secured or unsecured. Secured NCDs are backed by the issuing company's assets, which means in case of default, investors have a claim over the company’s assets. Unsecured NCDs, however, do not have this backing, making them riskier than their secured counterparts.

• Credit Rating: NCDs are often rated by credit rating agencies like CRISIL, ICRA, etc., which gives investors an idea about the risk associated with them. A higher credit rating indicates lower risk.

Why Invest in NCDs?

1. Higher Interest Rates: They typically offer rates higher than traditional fixed deposits.

2. Regular Income: They can provide a steady source of income through periodic interest payments (monthly, quarterly, annual, etc.).

3. Diversification: Adding NCDs to your investment portfolio can help diversify risks.

4. Liquidity: Many NCDs are listed on stock exchanges, providing an option to sell them in the secondary market before maturity.

Risks Involved

While NCDs sound appealing, they do carry risks:

• Credit Risk: The possibility that the company might fail to make timely interest payments or return the principal amount.
• Interest Rate Risk: Fluctuations in interest rates can affect the market value of NCDs if you plan to sell them before maturity.
• Liquidity Risk: Depending on market conditions, finding buyers in the secondary market can sometimes be challenging.

Example

Let’s say Tata Capital decides to fund its expansion plans by issuing NCDs. The NCDs might come with an 8% annual interest rate, with a maturity period of 5 years. If you invest ₹1,00,000 in Tata Capital's NCDs, you would receive interest payments according to the agreed schedule, and, at the end of 5 years, you would receive your principal amount back.

Conclusion

Non-Convertible Debentures offer a middle ground between equity and traditional debt options, providing higher returns with relatively higher risks. Before investing, it's essential to assess the issuer's creditworthiness and understand the terms and conditions thoroughly. Like any investment, NCDs should be considered as part of a diversified portfolio based on individual risk tolerance and investment goals.