What is the difference Between Convertible and Non-Convertible Debentures? Blogs

Escrito por el 22 noviembre, 2022

Non-convertible debentures are a financial instrument for companies to raise funds when in need. NCDs are standardised instruments and can be traded on exchanges, giving them superior liquidity than many other fixed-income assets. But before making an NCD investment, it is important that the investor checks the company’s health by means of their credit rating and understands the risk exposure they are taking. It is very natural that a company needs money for a variety of reasons. A company may need money to expand its business, buy new tangible assets, buy new land, or even plan to acquire another company.

Please read all scheme related documents carefully before investing. You can choose to invest in an NCD that meets your financial objective and investment horizon. This purpose should be clear and not ambiguous to ensure that the company uses investors funds for valid reasons towards the growth of the company. Secured NCD is safer among the two as the company’s assets or any collateral backs them. If the company fails to pay the promised amount on time, investors can claim their dues by liquidating its assets.

Non-convertible debentures (NCD) are fixed-income debt instruments that cannot be converted into equity. They have a fixed tenure and a maturity date upon which the issuing corporation or government has to repay the lenders. The interest rate on debentures is also called the coupon rate and it can be paid either monthly, quarterly, semi-annually or annually. Debentures are long-term debt instruments that a business offers to entice investors’ funds. A company may issue both convertible and non-convertible debentures, among several other categories.

Non Convertible Debentures (NCD): Meaning, Types, Features

Companies provide non-convertible debentures through open market public issues, which interested investors can buy within a specified period. Convertible debentures have lower interest rates than traditional debentures since the holder has the option to convert the debt into equity. Due to their greater yields, investors are more likely to purchase non-convertible debentures than other assets. The issuing business has the ability to convert convertible debentures into equity shares. Conversely, stock shares cannot ever be convert into non-convertible bonds. Unsecured NCDs are more risky than secured NCDs because they are not back by the company’s assets or any other security.

  • Unsecured NCDs are not backed by any asset or collateral by the company.
  • Because it must pay off all of its debts, the business has no assets.
  • Conversely, stock shares cannot ever be convert into non-convertible bonds.
  • Similar to bonds, NCDs also have a maturity date when the issuer returns the principal amount to the investors.

Corporate Fixed Deposits are term deposits offered by banks and non-banking financial companies for a fixed period of time and with a fixed interest rate. FDs are similar to NCDs in terms of high returns, fixed time period, and fixed rate of interest, but there are a few important differences that one must know. NCDs and the companies issuing them are rated by professional and certified credit rating agencies.

Example of a Debenture

To conclude, tax-free bonds are good for high tax bracket individuals, while debentures can be best suited for low tax bracket individuals. So if you are in the tax bracket of 20% or more, then investing in tax-free bonds is a better choice. You should look at the company’s financial health and end use of funds. Even if NCD get listed, low volumes (case of low rated NCDs) can deprive investors of any opportunity in exiting prematurely. In high interest rate scenario, NCDs offer high rates to investors.

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They have a fixed maturity date, and interest is payable either monthly, quarterly, half-yearly or annually, depending on the terms at the time of issue. Upon maturity, the investor will receive the principal amount and interest payment. Compared to convertible debentures, investing in NCD offers various benefits, including liquidity, low risk, and tax benefits. Fully-convertible debentures have the option to convert all of the debt into equity shares based on the terms outlined at the debt issuance. A convertible debenture is a type of long-term debt issued by a company that can be converted into shares of equity stock after a specified period.

It is a crucial factor in determining if a firm is a good credit risk and can satisfy its financial obligations. Organizations with good credit ratings are more likely to keep their promises, whereas companies with low credit ratings are more likely to break their promises. In other words, the agency’s rating will decline if the issuer cannot pay. If the economy experiences a severe downturn, convertible debentures can be exchange for equity shares. In contrast, non-convertible debentures cannot be exchange for equity shares and can only be redeem upon reaching their maturity date.

Non-Convertible Debentures (NCD): Meaning & Types

You should also check the rating of companies which gives an idea of the safety of your investment. A report by CRISIL says that not a  single instrument with AAA rating has ever defaulted. A secured NCD is backed by the assets of the company and if it fails to pay the obligation, the investor holding the debenture can claim it through liquidation of these assets. T-bonds help finance projects and fund day-to-day governmental operations.

Convertible debentures are hybrid financial products with the benefits of both debt and equity. Companies use debentures as fixed-rate loans and pay fixed interest payments. However, the holders of the debenture have the option of holding the loan until maturity and receiving the interest payments or converting the loan into equity shares. Instead, they have the backing of only the financial viability and creditworthiness of the underlying company.

Tax on any gain realised by selling NCDs after one year will be charged at a rate of 10% if indexation is not applied or 20% in case of indexation. NCDs are vulnerable to risks related to handling business and funding. Hence, the credit rating can take a hit if the turnover is negatively impacted. The company will have to borrow additional funds from banks or NBFCs to counterbalance the impact.

As long as the criteria establish when they were issue are met, these bonds will accrue interest at a specific rate and for a specify period of time (usually one year). At the conclusion of the term, the investor will receive both the principle and any accrued interest. Buying NCDs provides several advantages to investing in convertible debentures, including lower risk, greater liquidity, https://1investing.in/ and a more favourable tax situation. Unsecured NCDs are not backed by any asset or collateral by the company. To compensate for this drawback, the interest rate offered by the company for such debentures is higher than that offered on secured NCDs. If the company defaults in its payments towards unsecured NCDs, the investors do not have any choice but to wait for such payments.

In most cases, these types of NCDs are issued with a set maturity date, although this may vary depending on the issuer. The holder of an NCD receives interest payments over time until it reaches maturity when all principal becomes due. NCDs are characterize by the fact that their interest rate is fix.

NCDs are very flexible in tenure, with a minimum tenure of 90 days to maximum tenure of 10 years. Investors can opt for short or long term NCD based on their investment objective. The convertible debenture can be converted into stock, and this feature will serve to dilute the per-share metrics of the stock and reduce any earnings per share (EPS). You must check with your tax advisor before investing in any NCD. A very common example of a fixed deposit account is a certificate of deposit (CD). In other words, money cannot be withdrawn for any reason until the time-duration on the deposit has expired.

Credit rating tells the credibility of the issuing company that you would be deal. Since NCDs have no option for themselves, it depends on the repaying capacity of the issuer. Interest rate always plays an important role, and in the case of NCDs, it has an inverse relationship with the company offering these. Although the companies offering these are creditworthy, the higher the credit rating of the company, the lower the interest rate.

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