NCD – THE BEST DEBT INVESTMENT OPTION
What is NCD?
Non – Convertible debentures are fixed income products that offer nearly higher returns which are hard to stand up to.
An 11-12% fixed return to investors is an extremely enticing offer to oppose when equities are not doing great.
The companies issuing NCDs are promising double-digit rates, much more than bank Fixed Deposits or Company Fixed Deposits.
Not many fixed income instruments are able to deliver such high returns.
However, in last few years companies have raised great money through Non-Convertible Debentures (NCDs). The main fascination was high return to investors in comparison with other fixed income instruments like bank deposits.
What are Debentures?
If a company needs funds for extension and development purpose without increasing its share capital, it can borrow from the general public by issuing certificates for a fixed period of time and at a fixed rate of interest. Such a loan certificate is called a debenture. Companies or governments use debentures to borrow money.
Key Features of NCDs
NCD investment are listed on the open stock markets and exchanges.
Direct Bank Credit:
Interest on NCD investment is paid by a direct bank credit.
Issuance and Trading of NCD investment is in the demat form only.
Only companies with a good credit rating can issue secured NCDs.
Why NCD the best debt investment option : –
NCDs offer better risk adjusted returns compared to other debt investment options.
NCDs can be traded in secondary market and hence offer liquidity.
TDS is not applied on interest earned on NCDs
The debentues are generally offered in four options: monthly, quarterly, annual and cumulative interest
An NCD can be both secured as well as unsecured.
Secured and Unsecured NCDs
- Secured NCD : are backed by assets, in case the issuer is not able to fulfil its obligation, the assets are liquidated to repay the investors holding the debentures. Secured NCDs offer lower interest rates compared with unsecured ones.
- Unsecured Non convertible Debentures (NCD) : are not backed by any assets and if company is in financial crunch, there may not be able to pay back the bond holders.
How to buy NCDs?
- Public Issue: During the public issue issue of the bonds, you can put money into them by submitting a physical form furnishing the details as asked. Additionally, you can make an investment online through your Demat Account.
- Secondary Market: NCDs bonds are listed on NSE or BSE or now and again on both after the Public Issue. You can put money into these bonds through your demat account like the manner in which you put money into shares.
Checklist to buy best NCD (Non Convertible Debentures)
- Credit Rating: However, any company seeking to raise money through NCD has to get its issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. Higher ratings (e.g. CRISIL AAA or AA-Stable) means the issuer has the ability to service its debt on time and carries lower default risk. A lower rating signifies a higher credit risk.
- Coupon Rate: The rate of interest offered by the issuer of NCD is called Coupon.
- Credibility of the Issuer / Promoter: Before investing in NCDs, it is advisable to look at company’s financial health and end of use funds.
Debentures & Taxation:
- TDS is not applicable on the listed debentures’ interest payouts (which are in Demat form). Else, TDS will be applicable if the interest exceeds the threshold limit of Rs.5,000/- in a financial year.
- Interest earned on NCD bonds is taxable as per the tax slab of the investor.
- If you sell NCDs on stock exchange before one year from the date of purchase, Short Term Capital Gains Tax is applicable. Tax rates depend on the tax slab you fall into.
- If you sell NCDs on stock exchange before maturity but after one year, Long Term Capital Gains Tax (if any) at 20% with indexation & 10% without indexation is applicable.
Difference between Corporate FDs and NCDs
It would be highly beneficial to know the difference between corporate fixed deposits and NCDs as given in the following table:
|Corporate Fixed Deposits||NCDs|
|Unsecured against the assets of the bank or corporate||NCDs is either secured or not secured against the company assets|
|Exit route (especially early withdrawal) is difficult as it is often at the discretion of the company||Trade/transactions on stock exchanges is allowed|
|Interest earned (if more than Rs. 10,000) on corporate deposits has TDS||No TDS for registered NCDs|
|Deposit Insurance and Credit Guarantee Corporation insures bank FDs (up to Rs. 1 lakh).||NCDs are not insured, but are secured against the company assets|
|While you cannot sell FD in market, FDs enjoy more liquidity than NCDs||NCDs can be traded, but cannot be withdrawn prematurely|
|No interest risk||Interest can vary as per the market and hence carries higher risks|
What is Put Option in a NCD?
A put option in NCD means that the investor has an option to surrender the NCD if he wants to, and get back his/her principal. The put option provides the investor with a lot of flexibility. If NCD interest rates go up, and the investor can get better rates from the market, he can exercise the put option and get back his/her principal which can be invested elsewhere.
What is Call Option in a NCD?
A call option in NCD means that the company has an option to ask the investor to surrender the NCD in exchange for the principal investment. A call option gives flexibility to the company. If NCD interest rates go down, and the company can get funds at lower rates from the market, it can exercise the call option to give the money back and can raise money from the market at lower rates.
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- Multi-asset Portfolio: GFS offers a wide range of instruments for fixed income generation such as NCDs, Bonds and Corporate Fixed Deposit.
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