NCD'S - NON-CONVERTIBLE DEBENTURES
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What are NCDs?
Non‐Convertible Debenture is a financial instrument issued by Corporates for specified tenure to raise resources / funds through public issue or private placement. This debt instrument cannot be converted into equity. It is a fixed income instrument same as bank fixed deposit and can be traded on stock exchanges. Interest can be earned monthly / quarterly / annually / cumulative and on maturity principal amount is paid to the debenture holder.
Benefits of investing in NCDs
If one is looking for an investment that generates fixed income periodically, NCDs may be an ideal investment as it offers.
- Higher rate of interest as compared to fixed deposits, postal savings or similar investments.
- If the bonds are listed, liquidity as one can sell it in the secondary market before its maturity
- If listed bond possibility of capital appreciation i.e. one can sell your bond at a price higher than your cost price in the market
Features of Non‐Convertible Debentures
- Higher rate of returns: NCDs in the past have offered interest rates which were quite attractive as compared to interest on other fixed-income options.
- Flexible tenure: The tenure of NCDs can be anywhere between 2 years and 20 years, thereby providing better maturity opportunities.
- Lower credit risk: An NCD loses value when interest rate in the system goes up and gains when the interest rate declines. However, when the NCD is held until maturity, one is likely to realize the promised return and the risk due to movement in interest rates is eliminated or minimized.
- Professionally rated: NCDs are rated by certified and professional credit rating agencies.
- Easy liquidity: NCDs are generally listed securities hence one can sell them in the secondary market before maturity.
- Capital appreciation: As NCDs are listed securities, it can benefit from the fluctuations in stock market and may have capital appreciation.
- No Tax deduction at source: There is no tax deduction at source (TDS) on NCDs offered in DEMAT mode and listed on a stock exchange as per section 193 of the IT Act.
- Interest Payout Options: One could look at different interest payout options offered by NCDs such as monthly, quarterly, half‐yearly or annual interest payments.
Taxation on NCD
As per section 193 of the Income Tax Act, 1961, there is no tax deduction at source (TDS) from any securities issued by a company, in a dematerialized form and listed on a recognized stock exchange in India. However, NCDs allotted to non‐resident Indians (NRIs) will be subject to TDS as per section 195 of the Income Tax Act, 1961.
For individual investors, if the NCDs are sold before a year, the profits will be added to the income of the investor and he will have to pay taxes at the same rate as per the income tax slab. For any profit made by selling NCDs after a year, tax will be paid at 10%, if indexation is not done or 20% if the indexation is done.
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/‐.
Basis of NCD allotment
Allotment is based on “First come first serve” basis.
Where are NCDs bought from and sold to
Debentures can be bought and sold through secondary market. They are traded like shares
Is NCD a Share or a fixed deposit?
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.
Are NCDs taxable?
Dematerialized forms of NCDs are not taxable.
Things to be considered before investing in NCDs
Ratings: Rating agencies use simple alphanumeric symbols to convey credit ratings. For example, rating agencies assign credit ratings to debt obligations on three basic scales: the long‐term scale, the short‐ term scale, and the fixed deposit scale. AAA is the highest Credit rating by indicating highest safety. Higher rating indicates timely servicing of debt obligations by the issuer and lower amount of credit risk. Payback History Of Company: You must do a research and background study of the company, which is issuing the bond; after all it is your money. Check if the company has any history of default on its payment. If so it is unwise to invest in these instruments. However if the company has a good consistence history of repayment to its creditors then it is better to invest in NCDs of that company.
Secured and Non Secured NCDs: If the company in whose NCDs you have invested is wound up (closes down), it’s important for you to know where you stand when the company repays its debts. The order in which the Company repays its debts depends upon the ranking of the bonds based on the security Bonds are either secured against assets or unsecured. If the bonds are secured, in the event of winding up of the company, it would sell off the assets against which the bonds were secured and repay the investor. Listing & Liquidity: Debentures (convertible and/or non convertible) can be listed on a stock exchange, providing opportunities to accumulate additionally or to sell them and exit earlier than the tenure of the debenture. But investors have to be careful about the price movement of the instruments, which in turn depends upon the interest rate movements and the applicable coupon interest rate payable on them. More the liquidity better it is for the investor.
Varying Tenures: Redemption periods usually range from 2‐15 years. One should choose the tenure on the basis of his/her own personal financial goals and risk appetite.
Interest Payout Options: Depending on the requirement of the investors, one could look at different interest payout options offered by NCDs such as monthly, quarterly, half‐yearly or annual interest payments.
Who Can Invest in NCDs
Category I (Institutional Category)
Category II (Non Institutional Category)
Category III (Individual Category)
Who is not eligible to invest
The following categories of persons, and entities, shall not be eligible to participate in the Issue and any Applications from such persons and entities are liable to be rejected:
(a)Minors without a guardian *;
(b)Foreign nationals, Non‐Resident Indians (NRI) inter‐alia including any NRIs who are (i) based in the USA, and/or, (ii) domiciled in the USA, and/or, (iii) residents/citizens of the USA, and/or, (iv) subject to any taxation laws of the USA;
(c)Persons resident outside;
(d)Foreign Institutional Investors;
(e)Foreign Portfolio Investors;
(f)Qualified Foreign Investors;
(g)Overseas Corporate Bodies; and
(h)Persons ineligible to contract under applicable statutory/regulatory requirements.
*Applicant shall ensure that guardian is competent to contract under Indian Contract Act, 1872
Can the application be made on joint names
Applications may be made in single or joint names (not exceeding three). Applications should be made by the Karta in case the Applicant is an Hindu Undivided Family (HUF) . If the Application is submitted in joint names, the Application Form should contain only the name of the first Applicant whose name should also appear as the first holder of the depository account held in joint names. If the depository account is held in joint names, the Application Form should contain the name and PAN of the person whose name appears first in the depository account and signature of only this person would be required in the Application Form. This Applicant would be deemed to have signed on behalf of joint holders and would be required to give confirmation to this effect in the Application Form. Please ensure that such Applications contain the PAN of the HUF and not of the Karta. In the case of joint Applications, all payments will be made out in favour of the first Applicant. All communications will be addressed to the first named Applicant whose name appears in the Application Form and at the address mentioned therein.
How to Apply
Applications need to be submitted with the broker authorised to collect application forms of the Issue and should also ensure that bank account mentioned on the form is of ASBA Bank eligible for accepting applications. All the details needs to proper filled including Name, Demat account details and Bank details of the client. Broker will bid the application and provide TRS to the Investor.
There are altogether 62 designated Banks to accept forms for Banking and Blocking of Funds.
- Can the ownership of non-convertible debentures be transferred to another?
- Can I withdraw NCD before maturity?
- What is the maximum tenure allowed to keep the NCD open?
- Is NCD a tax-free investment?
- Are NCDs safe investments?
- NCD and bonds, what are the differences?
- How can I buy NCDs?
- Is a Demat account needed for NCD?
NCDs are tradable in the secondary market.
NCDs are debt instruments issued by public companies to raise long-term capital and need to list them on the stock exchange.
Companies issue non-convertible debentures when they want to raise capital from the market with a fixed maturity. The maturity period can be from 90 days to 20 years. You can't withdraw NCDs before maturity, but you can trade them on the secondary market.
NCDs have maturities of 90 days to 20 years. It allows you to choose non-convertible bonds from short-term and long-term tenures depending on your investment goals.
As the name suggests, non-convertible bonds can't be converted to shares but can be used for generating low-risk fixed income over a fixed tenure.
The interest earned on NCDs is taxed under the head' other income' per the applied tax slab either periodically or cumulatively. The interest is not subject to tax deduction at source if held in dematerialised form and listed on the bourses. The interest earned on NCD is regarded as capital gain and taxed following the capital gain tax rules.
Although NCDs are considered safe investments for retail investors, they should always look into the credibility of the issuing company before investing.
Secured non-convertible debentures are backed by the company's assets, which makes that low risk. If the corporation fails to honour the obligations of the NCD, the debenture holder can have a claim on the company's assets to recover his investment. But unsecured NCDs don't come with such protection, and in case of bankruptcy, the debenture holder can't raise a claim against the company.
Retail investors need to understand the risks before investing.
Although both are fixed-tenure debt instruments, bonds are backed by a government guarantee, making bonds risk-free. Corporations issue NCDs. A corporation may fail to meet its financial obligations and file bankruptcy. In terms of returns, NCDs pay higher interest compared to bonds.
Bonds usually have higher maturity tenure than debentures. Another critical difference is NCDs are tradable on the stock exchange. But most bonds are traded over-the-counter by large brokers on behalf of their clients.
To buy NCDs, one must submit an ASBA form to a registered broker. If you purchase using UPI, you must fill out the UPI ASBA with the broker.
Besides buying NCDs directly from the company, one can also purchase them in the secondary market. NCDs are listed on the stock exchange as debt instruments and available for trading.
Having a Demat account to invest in NCDs is essential as most debentures are issued in dematerialised mode.
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