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Want to invest in NCDs (Non-Convertible Debentures)?

Friday, March 15, 2013 | Category : Investment | 2 Comments
A debenture is a debt paper or bond instrument offered by companies that entitle investors to a fixed rate of interest payable periodically by the company and return of maturity value upon the completion of decided tenure.

Debentures Vs Company Fixed Deposits (FDs)

A plain vanilla debenture and a company fixed deposit (FD) more or less serve the same purpose except that the regulatory framework for issuing FDs is far stricter than that for issuing debentures. Debentures can be issued in a lot of variations – convertible debentures and non-convertible debentures or (NCDs). 

As the name suggests, convertible debentures can be converted into an equity share of the company at a specified time. The clause of conversion is given at the time of issuance of debentures. In sharp contrast, NCDs are those debentures, which are not convertible to equity shares. They work like company FDs, where you are lending a company to get some interest income and you get your money after few years. However, one needs to check the rating of that bond. Credit rating agencies usually rate such debt bonds.

Features of Non-convertible debentures: 

  •  NCDs are listed on stock exchanges. Hence, provides liquidity to holder
  •  The tenure of NCDs can be anywhere between 2 years and 20 years
  •  They are rated by rating agencies such as CRISIL
  •  If you buy an NCD that pays interest then the interest will not attract TDS
  •  Most NCDs have payout options like monthly, quarterly, annual and cumulative interest
  •  Debentures can be traded in the market like any other asset. Investors need not keep it until maturity

Given the unclear global and domestic equity environment, NCDs are reportedly attracting more eyeballs in the investor community. The reason why they are becoming so prevalent among investors is their high liquidity nature. 

Fetching higher coupon rates, NCDs act as a good link between uncertain returns of investing in equity shares and fixed returns from FDs offered by either banks or corporate houses. NCDs, by virtue of being traded in secondary markets, do not involve any lock-in period and hence enables an investor to liquidate his/her investment whenever required.

Recently, many companies like Shriram Transport Finance, Muthoot Finance, Manappuram Finance and Shriram City Union Finance rolled out NCD issues. Most of these issues are seemingly offering a higher yield to the retail investors who have invested in it.  

Since they seem very tempting, a slew of investors are likely to try their hands at NCDs. However, there are inevitable risk factors associated with any kind of investments. Thus, before investing in an NCD, investors should check the financials of the company that is issuing the product. It is necessary to check out Interest Coverage Ratio, Capital Adequacy Ratio and Non-Performing assets of the company. This becomes highly important when the company is a non-banking finance company (NBFC).

Having watched the company’s financial strength, an investor needs to check the other aspects of its business like its multiple sources of revenue, to whom it is lending its money, etc. Also, one must check out the company’s asset quality in terms of its non-performing assets (NPA) and evade lending money to a company with a high level of NPA.

 Disclaimer:

1. Views as are mentioned in the article are personal views of Author and nothing to link with Co., its Director and Employees.

2. All investments are subject to market risk and you need to consult your financial advisor/consultant before investment

Comments:
Rushabh Shah - Tuesday, April 09, 2013
Useful article.

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