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Non Convertible Debentures (NCDs): Meaning, Types & Examples

Anshika

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.

What Are Non Convertible Debentures

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.

Non Convertible Debentures Meaning & Definition

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

How Do Non Convertible Debentures Work

The working mechanism of NCDs involves:

  1. Issuance: Companies issue NCDs through public issues or private placements.

  2. Coupon Payments: Interest is paid monthly, quarterly, semi-annually, or annually depending on the structure.

  3. Listing: Most NCDs are listed on NSE/BSE, providing liquidity.

  4. Maturity: At the end of the tenure, the issuer repays the principal.

  5. 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).

Features of Non Convertible Debentures

  • 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.

Types of Non Convertible Debentures

NCDs are classified based on security, interest payout, and maturity structure:

1. Secured NCDs

Backed by the company’s assets, offering more safety.

2. Unsecured NCDs

Not backed by collateral; generally offer higher interest to compensate for additional risk.

3. Cumulative NCDs

Interest is not paid periodically. It accumulates and is paid at maturity along with the principal.

4. Non-Cumulative NCDs

Interest is paid at regular intervals (monthly, quarterly, etc.).

5. Callable NCDs

The issuer can redeem them before maturity.

6. Puttable NCDs

Investors have the right to demand premature redemption.

Benefits of Investing in Non Convertible Debentures

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.

Risks of Non Convertible Debentures

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.

Non Convertible Debentures Interest Rate

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.

Conclusion and Key Takeaways

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.

Disclaimer

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.

FAQs

What is a Non-Convertible Debenture?

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.

How do Non-Convertible Debentures work?

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.

What are the benefits of Non-Convertible Debentures?

Benefits include higher interest rates compared with many traditional debt products, predictable income, and useful diversification within a fixed-income portfolio.

What are the risks involved in Non-Convertible Debentures?

Key risks include credit risk, interest rate fluctuations, potential issuer default, and limited liquidity for certain issues, especially in the secondary market.

What is the difference between Convertible and Non-Convertible Debentures?

Convertible debentures allow conversion into equity shares, offering potential capital appreciation, whereas Non-Convertible Debentures remain purely debt instruments with no conversion option.

Hi! I’m Anshika
Financial Content Specialist

Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact. 

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