Non-Convertible Debentures (NCD)

There are two types of Non-convertible Debentures-

• Secured NCD: These NCDs are considered safe as the issues are sponsored by the assets of the company. In case the issuing company fails to pay the investor on time, he/she can recover the funds by liquidating/ selling the company assets. The interest rate on the secured NCD is low compare to another type of NCD- unsecured NCD.
• Unsecured NCD: These NCD bonds contain risk as they are not backed/ sponsored by the assets of the issuing company. By any chance, if the issuing company fails to pay the due to the investor, he/she has to wait to receive the payment as there are no assets available to liquidate/ fund their on-time payments. Although the interest rate of unsecured NCDs is higher than the secured NCD.
• Fully Convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice. The issuer decides the ratio of conversion. Upon conversion, the investors enjoy the same status as ordinary shareholders of the company.
• Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at the time of subscription.
• Optionally Convertible Debentures (OCD): The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue.
• Non Convertible Debentures (NCD): These instruments retain the debt character and cannot be converted into equity shares

NCDs are subjected to short-term as well as long-term capital gain tax. The interest earned from the NCD investment falls under the ‘Income from other sources category’.Further, if the NCDs are sold on the leading stock exchange, CG taxes are applicable which are as follows:

• Non-convertible debentures sold within the 12 months of tenure from the date of investment/ allotment- short-term capital gain tax are applicable under normal tax bracket.
• Non-convertible debentures sold after the 12 months of tenure from the date of investment/ allotment- LTCG tax are applicable at the rate of 10% without indexation/ 20% with indexation. Whichever is applicable or lower.

Following are the categories from which NCD applications are accepted:

• Retail Individual Investors which includes Indian citizens residing in India and Hindu Undivided families (HUFs) applying for NCD for above ₹1,00,000.
• High Net-worth Individuals which includes Indian citizens residing in India and Hindu Undivided families (HUFs) can invest in Non Convertible Debentures for above ₹1,00,000.
• Institutional category which includes mutual funds, venture capital funds, pension funds, public financial institutions, Commercial, regional rural and co-operative banks, provident funds.
• Non-institutional category which includes Limited liability partnership (LLP), Partnership firms, scientific and industrial research organizations (only a few of them), Public and Private charitable trusts can invest in current and forthcoming NCD issues.

There are certain steps involved in the allotment of NCD Bonds:

• The NCD issue registrar collects the application from different investor categories.
• All the eligible investors/ applications are then scrutinized based on the categories- Institutional, Non-institutional, High net-worth individual, and retail individual investors.
• NCD allotments are done on a first come first serve basis for each investor category based on the reserved quota.

There are certain criteria to meet for the company to issue non-convertible debentures in India. Companies issue new NCD bonds to raise funds for their business. Any company is eligible to issue NCD if the following conditions are met:

• It must have a net worth equivalent to or more than ₹4,00,00,000.
• Must have sanctioned working capital limit/ term loan by the bank.
• The company’s borrower account must be classified as the standard asset by the bank.
• The company should have the credit rating to issue new NCD bonds from the rating agencies such as CRISIL, ICRA, FITECH ratings India Pvt. Ltd or CARE.

Cumulative option seems to be the best as it offers the highest yield and allows to reinvest the interest at the same coupon rate / interest rate (i.e., there is no reinvestment risk).

NCD is neither a share nor fixed deposit. It is similar to fixed deposit in the sense that at time of redemption, the return is fixed.

Dematerialized forms of NCD Debentures are not taxable.

No, there are no special benefits for senior citizens by investing in NCD.

Applicants are not allowed to make changes. They can withdraw their Application at any time prior to the Issue Closing date.

Allotment is based on “First come first serve” basis.

NCD Debentures can be bought and sold through secondary market. They are traded like shares.

No. In the case of public issue of debentures, there would be a large number of debenture holders on the register of the company. As such it shall not be feasible to create charge in favour of each of the debenture holder.

Section 71 and other applicable provisions of the Companies Act, 2013 regulates the provisions relating to NCD debentures.

Amount invested by a single investor is as decided by the company and varies with the issuances. Usually investors can start investing with amounts as low as Rs 10000/-.