Non Convertible Debentures (NCD)by Nishant Dhar Consultant
NCDs are financial
instruments issued by the companies to raise long term capitals which are done
through public issue. These are debt instruments with fixed tenure and people
investing in these receive a regular interest at a certain rate.
At the discretion of the owner, some debentures can be converted into shares after a period of time. But, in case of Non convertible debentures, this is not possible; though it cannot be converted into shares but they offer other benefits.
Types of Non
Secured NCDs: These NCDs are the ones that are backed by the company’s asset. If
in case the company fails to pay, the investor can claim it through liquidation
of assets. It also comes with a host of benefits.
· Unsecured NCDs: These NCDs are not backed by the company’s asset, hence they are risky.
· Interest rates: The rate of return is around 11% -12%, when compared with most investment options, NCDs provide high-interest rates.
Credit rating: Companies with good credit rating can only issue NCD. Credit rating agencies rate NCDs too. The ratings are subjected to revision on a regular basis.
Issuance: Companies provide NCD through an open issue which an investor can purchase within a specific period. Also, it can be purchased through stock market.
Liquidity: As NCDs are listed on the stock exchange, one can easily withdraw it. Redeeming of NCD may be a bit tougher than selling regular stocks, but are more liquid than the bank FDs.
Check company’s background
Check the Credit Rating of the issuer as it helps to calculate the company’s potential in raising cash from its internal and external operations.
Check on the level of debts, if the company allocates more than 50% of the total assets towards unsecured loans, then do not invest in those companies
Check Capital Adequacy Ratio (CAR) as it provides company’s capital and check whether the company is having sufficient fund to survive losses, ensure that at least 15% CAR in the company you plan to invest
Check the provisions for Non Performing Assets
Interest Coverage Ratio
Your tax slab
investing in NCD:
Check the terms and condition before investing whether the company is
clearly defining the flow of
money then only invest or else don’t.
Never go with the interest rate alone as it has no value in case the NC
yield remains low.
Diversification in various companies can help reduce the risk.
Created on Sep 12th 2019 04:48. Viewed 25 times.