Introduction
Debentures are long-term debt financial instruments companies use to gather capital from investors. They hold a fixed interest rate for a specific span. A company can issue different forms of debentures, namely convertible debentures and non-convertible debentures. Convertible debentures can be transformed into equity shares of the stock exchange, whereas non-convertible debentures cannot.
Bonds are almost similar to debentures, but unlike bonds, debentures are not secured. In case of any defaults, the investors will have no claim for the company’s assets. Since the repayment mode is entirely dependent on the credit score of the issuing company, debentures are generally issued by highly rated and large companies with a triple-A credit rating. The debentures are an effective way for the corporations to utilise their privileged status to their benefit, taking money without any attached strings or security.
Debentures are legal certificates that state how much money was borrowed by the lender, the principal amount, the scheduling of payments, and the rate of interest to be paid. At the end of a debenture term, the investor receives the principal money back to their account when the debenture matures.
Companies use four different debentures to borrow money at a fixed interest rate. The types are Unsecured and secured debentures, Bearer and Registered debentures, Convertible and Non-Convertible Debentures, and first and second debentures.
Non Convertible Debentures are instruments of the fixed income usually issued by top-class companies. The non-convertible debentures are in the form of public issues utilised to gather long-term finance. These types of debentures have a higher rate of interest compared to convertible debentures. Let us check out the entire article to learn more about non-convertible debentures, how it works, their benefits and other features.
Before issuing, a company must know what non-convertible debentures are. The top-rated companies issue the non-convertible debentures to raise their capital for any venture. Generally, the non-convertible debentures are not supported by any collaterals. Investors can only depend on the ratings and credit worthiness of the issuing companies given by the credit agencies. These ratings allow the investors to understand the worth of a company and its future expectations and also will enable them to determine whether the company is eligible for a debenture or not.
However, the non-convertible debentures carry a fixed rate of interest, and they also possess a selected date of maturity. Also, the interest payable for the principal amount is paid quarterly, monthly, half-yearly or yearly. The paying of the interests depends on the terms agreed at the time of issuance of a non-convertible debenture to raise funds. Compared to the convertible debentures. Non-convertible debentures have numerous benefits like low risks, tax benefits, liquidity, and maximum returns. It is suitable for the Triple A-rated companies to raise funds for specific purposes.
A secured non-convertible debenture is considered safer than an unsecured non-convertible debenture, and it is because the company’s assets back a secured, non-convertible debenture. For instance, an investor can only invest when the company declares non-convertible debentures after its trade in the secondary stock exchange market. Moreover, being an investor, you must check the company’s creditworthiness, the non-convertible debentures’ coupon rate and the issuer’s credibility. It is better if you can purchase a non-convertible debenture of a higher rating such as AAA+ or AA+.
Suppose the company or the organisation fails to repay the principal amount within the mentioned time. In that case, the investors can liquify the company’s assets to recover their funds.
There are different types of debentures that can be issued by companies. Below mentioned is the list of debentures.
In secured debentures, a charge is placed on the enterprise’s assets or properties for the purpose of payment. The charge can be either fixed, or it might be floating. Fixed charges are issued against those assets that appear in the enterprise’s possession. They are utilised for the activities that do not involve any sale, while floating charges, on the other hand, include the assets keeping aside those that are meant for the secured creditors. A fixed amount is issued on a particular asset. However, a floating charge is established on the general assets of the company or the organisation.
They do not possess any particular charge on the enterprise’s assets. However, the investor can establish a floating charge on this type of debenture by default. Debentures are usually not circulating in unsecured form.
Redeemable debentures are those types of debentures that remain due at the time of their tenure and end in small instalments or lump sums during the entire lifetime of the enterprise. The debentures can be reclaimed either at par or at a premium.
The irredeemable debentures are also known as perpetual debentures. The company or the organisation will not give you any added time to repay the money borrowed or acquired by circulating such ncd investment.
These are the debentures that can be transformed into equity shares or any other security forms at the will of the debenture holder or the enterprise. The convertible debentures are either partly changeable or entirely convertible.
The debentures that are non-convertible into shares or other securities are known as non-convertible debentures. Most of the categories of debentures that are circulated by the organisations fall under this segment.
The specific coupon rate debentures are circulated with a mentioned interest rate which is called the coupon rate.
The variation between the principal amount and nominal amounts is treated as an interest amount, and it is connected to the term debentures. These debentures particularly do not have any specific rate of interest. To restore the debenture investors, the zero-coupon rate debentures are circulated at a discounted price.
These are ncd investment debentures in which the details of the holders, including addresses, particulars of holding, names, and other essential pieces of information, are stored in a register that the organisation keeps. A normal transfer deed can only be used to move such a form of debentures.
Bearer debentures can be transferred by delivery mode, and the enterprise does not hold any record of the debenture holders. In such a case, the bearer debentures are given to a person or entity who can show an interest coupon attached to those debentures.
The above mentioned are the different debentures that a company can issue to raise funds. The convertible and non-convertible debentures are the most common types of debentures issued. But before debenture issuance, it is necessary to know non-convertible debenture NCDs and tax slabs in detail.
The non-convertible debentures can be issued to and held by primary banks, individuals, primary dealers and other companies. It can also be issued to the mutual funds incorporated or registered in India, unincorporated bodies, Foreign Institutional Investors, and Non-Residing Indians. Investment in the non-convertible debentures by the primary dealers or the banks is subject to the approval of the respective regulators. Also, investment in the non-convertible debentures by foreign institutional investors should not cross the borders set forth at times by the SEBI body. Before investing or issuing the non-convertible debentures, you must know non-convertible debentures meaning with proper knowledge and understanding.
There are multiple reasons why you must invest in non-convertible debentures.
These are some advantages of investing in non-convertible debentures.
Also, some eligibility criteria must be fulfilled to apply for non-convertible debentures. Any corporate or NBFC is eligible for issuing a debenture depending upon the following conditions.
For purchasing a non-convertible debenture, you can directly visit the website of the issuer and can apply for the debenture by making an online payment. This will happen only if the online payment mode is open to the investors. Also, if you have a Demat account with any stock market brokerage like the ICICI direct or HDFC securities, you can apply for a non-convertible debenture directly from there. Also, there are centres for the issuance of a non-convertible debenture which are intermediates like the registrar agents or the brokers.
These agents are allowed to accept the NCD in physical forms. For applying for a non-convertible debenture, an individual can submit the ASBA forms ( for the UPI investors ) to any registered broker. They might also purchase these debentures from the secondary market if they are listed on the stock exchange.
Below are the procedures for applying for a non-convertible debenture in the online and offline procedures.
This is how you can apply for a non-convertible debenture.
The non-convertible debentures have tax implications depending on the tax category under which the investor falls. If the debentures are sold within a year, then the tax will be applicable according to the income tax slab rate. If the debentures are sold after a year or before the maturity date, the tax will be applicable at 20% with indexation. The interest income from the non-convertible debentures is taxed similarly to the fixed income securities, which are charged under ” income from other sources “.
The non-convertible debentures are prone to risks related to funding and handling business. Therefore, the credit ratings might be affected if the turnover amount is negatively impacted. The enterprise will then have to borrow extra money from the NBFCs or banks to cover the impact. Hence, every ncd investment investor should consider a few things before choosing a company with non-convertible debenture.
Credit rating is a vital element to consider before opting for a non-convertible debenture. You must opt for an enterprise with a higher credit rating, which means that the company must have an AA or higher rating. The company’s credit rating shows its ability to sustain credibility and its operations. Thus, investing in company debentures with a higher rating is always safer.
This is another crucial point you must consider before investing in a company NCD. You must check the financial statements of the enterprise. It will offer you details about the company’s debt-equity ratio, assets and other pieces of information about the financial position of the company. Also, you must ensure that the company or enterprise you choose is not heavily burdened with debt.
The company should be such that it can regularly assign provisions for the non-performing assets. It ensures that the enterprise has profits to remove the investors’ risks and meet their obligations.
The CAR, or the Capital Adequacy Ratio, is a statistical indicator that determines whether a company has enough monetary funds to survive at the time of potential losses. The company must be able to maintain this ratio. Being an investor of a non-convertible debenture, you must check this before selecting the company.
The interest coverage ratio or the ICR or a company defines the number of times the enterprise can serve its debt obligations using its present earnings. In simple words, the ICR is the ability of the company to handle debt payments. A higher rate of interest coverage ratio is a symbol of a healthy company.
You can choose to invest in a company debenture that can meet the requirements of your investment horizon and financial objectives. The companies issue Non-Convertible debentures to raise funds for a particular purpose. The purposes must be clear to the investors and not ambiguous to ensure that the enterprise utilises the investors’ funds for valid purposes for the company’s growth. Thus, the document offered at the time of investment should contain all these pieces of information.
There are numerous features of the non-convertible debentures.
The investors can subscribe to the non-convertible debentures at the time of public issue within a specified time period. Also, these debentures are listed on the stock market, where the investors can subscribe through registered brokers or securities.
The non-convertible debentures have higher liquidity compared to other types of debentures, and it is because they are required to be listed on the stock exchange. Therefore, an investor can buy or sell the debentures whenever they want in the secondary stock market. It is an essential feature of non–convertible debentures or ncds that allows investors to liquidate their debentures during an emergency.
The interest rate for the principal amount is considerably higher compared to the rate of interest on the fixed deposits. Besides, the interest rate for unsecured debentures is higher than for secured debentures. They have payment flexibility; being an investor, you can repay the amount monthly, quarterly, bi-yearly or yearly. Additionally, the non-convertible debentures have an added payout option as well.
The non-convertible types of debentures are flexible in terms of the time period. It can offer you a minimum tenure of ninety days whereas a maximum time period of ten years. Investors can also choose between short and long-term non-convertible debenture based on their investment objective.
The taxation of the ncd investment is the same as that of the debt taxation. If the investor sells their debentures within three years, the taxes will be applicable per the income tax slab rate. Subsequently, if the investor sells their debentures after three years, the tax applicable will be 20% with indexation.
The enterprises or the brands that issue the non-convertible debentures must reach the credit house like CARE, ICRA, and CRISIL to obtain the ratings. It helps to determine the company’s trustworthiness and credit score and the company’s potential, whether it can fulfil the investors’ criteria. A company with a higher credit score can achieve the obligations of the investors, whereas a company with a lower credit score involves higher credit risk. Therefore, if the issuing company contains default payments, its credit score will fall drastically.
Though the debentures are a quick mode for the companies to raise funds for performing their planned activities, there are also risks. Also, being an investor, you must have reasonable knowledge before acquiring a non-convertible debenture issued by a company. The non-convertible debentures cannot be converted into equity shares, unlike the convertible debentures. There are other pros and cons of investing in this type of debenture. So before investing, you should know what non-convertible debentures are.
Final Words.
There are numerous advantages and disadvantages of investing in the non-convertible debentures issued by organisations or NBFC. These types of debentures are suitable for those investors who are willing to invest their money at a higher rate of return and who possess the ability to take risks. Therefore, there are thousands of institutional investors who prefer non-convertible debentures. But for every individual, several other profitable investment options might be available in the secondary market. The mode of investing in the non-convertible debentures entirely depends upon the investor.
Compared to other debenture modes, non-convertible debentures are fruitful because they offer a higher rate of return. The non-convertible debentures can also be a suitable option to broaden your stock market portfolio. Learn all the market risks and other pros and cons of NCDs and invest in them.
The minimum amount to be invested by an investor depends on the company's requirements, and it changes with the issuances. Generally, an investor can also invest a minimal amount of ten thousand rupees initially.
The non-convertible debentures are issued to the investors on a first-come, first-serve basis.
The non-convertible debentures can be bought and sold in the secondary market. The method of selling and purchasing the non-convertible debentures is the same as that of the shares in the share market.
Non-convertible debentures are neither fixed deposits nor shares. A similar thing between a non-convertible debenture and a fixed deposit is that the amount of return for an NCD is also fixed at the time of redemption.
Dematerialised forms of non-convertible debentures are non-taxable.
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