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Understand non-convertible debentures to explore how fixed-income instruments offer stable returns without equity conversion.
Non-Convertible Debentures (NCDs) are among the most widely used fixed-income investment instruments in India, which is used by corporations to raise long-term capital and by investors for fixed-income exposure. They offer predictable interest payouts, varying tenors, and risk characteristics that differ from market-linked securities. This article explains the meaning, working, features, types, benefits, risks, and key considerations related to NCDs.
Non-Convertible Debentures (NCDs) are fixed-income debt instruments issued by companies to raise long-term funds. They are called “non-convertible” because they cannot be converted into equity shares at any point—unlike convertible debentures.
Investors lend money to the company for a fixed tenure, and in return, the company pays a predetermined interest rate (coupon rate) at periodic intervals. At maturity, the principal amount is returned.
NCDs are regulated by SEBI and are usually listed on stock exchanges, which allows investors to trade them before maturity.
NCDs represent a formal acknowledgment of debt, backed by the issuer’s promise to pay interest and return the principal. They may be secured or unsecured, depending on whether the company provides collateral.
Key characteristics include:
A fixed interest rate
Defined maturity period
Non-convertibility into equity
Can be listed and traded in the secondary market
Governed by strict disclosure rules
The working mechanism of NCDs involves:
Issuance: Companies issue NCDs through public issues or private placements.
Coupon Payments: Interest is paid monthly, quarterly, semi-annually, or annually depending on the structure.
Listing: Most NCDs are listed on NSE/BSE, providing liquidity.
Maturity: At the end of the tenure, the issuer repays the principal.
Tax Treatment: Interest earned is taxable as per the investor’s slab rate.
NCDs function similarly to bonds, offering predictable income and principal protection (especially if secured).
Fixed Interest Rate: Provides stable and predictable returns.
Credit Rating: Assigned by agencies such as CRISIL, ICRA, or CARE, helping investors evaluate risk.
Security Type: Can be secured (backed by assets) or unsecured.
Liquidity: Listed NCDs can be bought and sold on exchanges.
Tenure Flexibility: Typically ranges from 1 to 10 years.
Interest Rates: Often higher than those of bank fixed deposits.
NCDs are classified based on security, interest payout, and maturity structure:
Backed by the company’s assets, offering more safety.
Not backed by collateral; generally offer higher interest to compensate for additional risk.
Interest is not paid periodically. It accumulates and is paid at maturity along with the principal.
Interest is paid at regular intervals (monthly, quarterly, etc.).
The issuer can redeem them before maturity.
Investors have the right to demand premature redemption.
Consider the following features associated with investing in Non Convertible Debentures:
Higher Interest Rates: Often higher than bank FDs or savings instruments.
Regular Income Stream: Suitable for retirees and income-seekers.
Lower Risk Compared to Equity: NCDs are less volatile and offer predictable returns.
Liquidity Through Exchange Listing: Investors can exit before maturity.
Secured Options Available: Offers safety through asset-backed security.
Diversification: Adds stability to an investment portfolio.
Despite the advantages, NCDs carry certain risks:
Credit Risk: If the issuer’s financial health deteriorates, interest or principal payments may be delayed.
Interest Rate Risk: Market interest rate fluctuations can affect the market price of NCDs.
Liquidity Risk: Not all NCDs actively trade on exchanges.
Default Risk: Unsecured NCDs carry higher chances of default.
Market Risk: Listed NCD prices may fall, affecting resale value.
NCD interest rates typically range between 7% and 10.5% as observed in recent issuances, depending on:
Issuer’s credit rating
Market interest rates
Tenure
Security (secured vs unsecured)
Economic conditions
Higher-rated NCDs may offer lower returns, while lower-rated or unsecured NCDs may offer higher yields.
Non-Convertible Debentures offer steady and predictable returns, making them suitable for investors who prefer fixed-income products. With options for different tenures, interest payouts, and listing benefits, they can strengthen portfolio stability when chosen wisely. However, understanding the associated risks—especially credit and liquidity risk—is important before investing.
Key Highlights:
NCDs provide stable, fixed-income returns with flexible structures.
Credit risk and liquidity risk are the primary concerns.
Issuer ratings and financial strength must be evaluated carefully.
Listing benefits can improve liquidity but vary across issuances.
Well-selected NCDs can add balance and stability to a diversified portfolio.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
A Non-Convertible Debenture is a fixed-income security issued by a company that cannot be converted into equity and remains a pure debt instrument throughout its tenure.
Non-Convertible Debentures function as loans from investors to a company, where investors receive periodic interest payments and the principal amount is repaid in full at maturity.
Benefits include higher interest rates compared with many traditional debt products, predictable income, and useful diversification within a fixed-income portfolio.
Key risks include credit risk, interest rate fluctuations, potential issuer default, and limited liquidity for certain issues, especially in the secondary market.
Convertible debentures allow conversion into equity shares, offering potential capital appreciation, whereas Non-Convertible Debentures remain purely debt instruments with no conversion option.
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