Non Convertible Debentures

Posted by nishantdhar on September 23rd, 2019

When a company wants to raise money from the public, debt papers are issued for a specific time period, these are known as debentures. It pays fixed interest on the investment. Some debentures are Non convertible as they cannot be converted into equity shares on maturity; the principal amount with accumulated interest is too paid to the holder of the instrument. NCDs are a fixed income product which offers higher returns comparatively.

NCD are of two types- secured and unsecured. Secured NCDs are safe as they are backed by company’s asset, whereas unsecured NCDs are risky as they are not backed by company’s asset.

How to buy Non Convertible Debentures?

 Any investor willing to buy NCD must hold a demat account. The process of buying NCD is similar to that of shares. You are required to login to your account with your trading credentials, or you can ask your broker to purchase NCD on your behalf.

In whichever way you buy, NCDs are held in your demat account. As NCD carry a fixed coupon rate therefore, you will receive the interest payment on the record date which is fixed by the company. Most NCDs are presently offering a yield which is higher than bank FDs.

How does it work?

 Companies offer NCDs for investors in order to raise money for a period ranging from 1-5 years and offer a coupon rate or interest rate. For example, ABC company offered NCDs at a face value of Rs. 1000, these then get listed on exchanges at a price.

Who should invest in NCD?

 A person who expects consistent, stable return with low risk.

People who invest in FDs can look at NCDs in order to improve their return.

A person with fixed income security looking for portfolio diversification.

What is Tax implication for investors investing in NCDs?

As per the provisions of Sec 193 of the IT Act, Income Tax is not deductible at source.

As per the income tax slab of the investor, the interest will be taxable in the usual course.

If an investor sells NCD at the stock exchange, it is treated as a long term capital asset.

Key Parameters of NCDs

Coupon Rate: It is referred to as the interest rate payable to the investor.

Face Value: It is referred to as the nominal value of an NCD stated by the issuer.

Redemption: It is referred to as the return of an investor’s principal.

Market Value: It is the last reported sale price.

Yield: It is the annual returns on an investment expressed as a percentage