NCD or Non-convertible debenture is a debt instrument issued by a company. It pays out a fixed interest rate. It is called ‘non-convertible’ because it cannot be converted into equity shares of the company issuing it.
Secured NCD v Unsecured NCD
An NCD can be secured against specific assets of the company or it can be unsecured. A secured NCD is backed specific assets like land, buildings or machinery. An unsecured NCD is backed only by the cash flows of the company issuing it. As a result, a company will pay a higher rate for an unsecured NCD than a secured NCD.
Listed NCD v Unlisted NCD
An NCD can be listed on a stock exchange or unlisted. If it is listed, the NCD issuer does not deduct TDS on the NCD interest payments. You can also sell a listed NCD on the stock market before maturity. On the other hand, you cannot easily sell an unlisted NCD.
Rated NCD v Unrated NCD
An NCD is usually rated by ratings agencies such as Crisil, CARE, ICRA and Brickworks. The ratings go from AAA which is the highest rating to BBB-. Ratings below this level are considered junk. The ratings agencies analyse the financial health of a company before assigning a rating. They also periodically check the company’s financial statements and either retain the rating or revise it upwards or downwards. A downgrade in a company’s overall rating can also affect the ratings of the NCDs issued by the company.
The interest paid by an NCD is fully taxable. However if the NCD is listed, no TDS is deducted on the same..
Who can apply
Resident Individuals and financial institutions can apply for NCDs. NRIs cannot apply for NCDs. They are usually divided into different categories of applicants.
- Category I and II investors are institutional investors including various financial institutions, commercial banks, insurance companies, alternative investment funds, provident funds, SEBI registered mutual funds etc.
- Category III comprises of Resident Indians and Hindu Undivided Families (HUFs) who invest more than 10 lakh
- Category IV comprises of Resident Indians and HUFs who invest less than 10 lakh.
NCDs can have tenures ranging from 2 – 10 years.
|Issuer||Interest Rate*||Issue Dates|
|Tata Capital Financial Services||9.1%||10th-21st Sep 2018|
|Aadhar Housing Finance||9.2%||14th-28th Sep 2018|
|Indiabulls Commercial Credit||9.6%||11th-28th Sep 2018|
Rates are different for different tenures and applicants. Highest rates mentioned.