Non-convertible debentures (NCDs) are high returns fixed income products offered by the company to investors through a public issue. The investors can be retail, high networth individuals or financial institutions. When companies want to raise money, they issue these NCDs for specific periods. Thus, NCDs are a debt instruments issued for a specified period which pay a fixed interest rate mentioned at the time of issue.
These debentures, as the name suggests, are non-convertible into shares of the company during or after the expiry of their tenure. Instruments which are eligible of being converted into equity shares of the company on maturity or particular time frame and are known as convertible debentures. The benefit on NCDs over Convertible Debentures is that these NCDs have a higher rate of interest and the principal along with the interest is repaid at the maturity of the tenure of the instrument.
NCDs can be further classified into secured and unsecured.
- Secured NCDs are backed by the assets of the issuing company and incase of any failure of repayment, these assets can be liquidated by the holder of these assets to recover his dues.
- Unsecured NCDs do not have any such backing by any assets in case of a default by the company.
Companies issuing a NCD are required to get themselves rated by agencies like CARE, CRISIL, Fitch Ratings, etc. A higher rating like CARE SME 1 or CRISIL AAA indicates that the issuer will be able to service its debt on time and will carry a lower risk of default compared to a lower credit rating which carries a high default risk or high risk of delay in interest payment.
Since coupon rate is fixed at the time of issue, in a rising interest rate scenario, companies having issued NCDs stand to gain. Conversely, in a declining interest rate scenario, companies having issued NCDs at higher coupon rates previously look on mark-to-market basis. Also, NCDs are typically issued for higher time frames such as 10, 15, 20 years. There can be a lock-in or buy-back option to them.