Unlike shares, NCDs are non-convertible debentures where the NCD holder gets a fixed return as interest income. NCDs are issued by both public sectors and private-sector companies as debt instruments. Whenever a company wants to raise funds as a loan then it raises it by issuing Non Convertible Debentures. if it is issued in public then it is called a public debt issue and if it is issued privately then it is called a private placement issue. It can be listed or unlisted on stock exchanges.
What is non convertible debenture?
Here non convertible debentures mean a debenture that is non convertible in equity at any point of time. Generally, non convertible debentures provide periodic interest income till its redemption date. Every non convertible debenture has a defined tenure. After the completion of the tenure of NCD, it is going to be redeemed by the company at a predetermined amount. Here redemption means the company is going to return back the money which is borrowed from the person earlier.
Types of Non Convertible Debentures
There are many types of debentures as per the nature of the debt. But Generally in market, we consider only two of these types on the basis of the Security of NCD, here first one is secureed and the second one is unsecured.
Secured Debentures are those debentures where some assets are charged by the trustee on behalf of the investor. It can be of many types in accordance of the type of security provided, for example, secured by pari passu floating charge or fixed charge on the assets of the company, secured by Subordinate floating charge or fixed charge on the assets of the company etc.
Unsecured Debentures are those debentures where no such security is available like secured debentures. Generally, here no asset is backed as security for these debentures. At the time of liquidation, the company can pay off the debenture holders only if it is left with cash after paying all the secured debentures or loan holders, government charges/expenses and preferential creditors.
How do Non Convertible Debentures work?
Non-convertible debentures are just like regular stocks with a predefined maturity date without any equity benefit and without any voting rights. Here the NCD holders receive regular interest payments as per the issue details.
Generally, there are 5 types of interest payout
1. Cumulative Interest Payout- interest is paid with face value amount on the maturity date
2. Annual Interest Payout- interest is paid every year month till the maturity date
3. Half Yearly Interest Payout- interest is paid in every 6 months month till the maturity date
4. Quarterly Interest Payout- interest is paid in every quarter month till the maturity date
5. Monthly Interest Payout- interest is paid in every month till the maturity date
How to invest in NCDs or Bonds
So here we have two ways to invest in NCDs, first is through Initial Public Offering just like Stock IPO and second by buying it from existing investors from stock exchanges or directly. You should note that in both cases you should have a Demat account because it is compulsory to have a Demat account. Without a Demat account, we are not eligible to hold debentures in accordance with the law.
So if you are planning to invest in an initial public offering then you can invest in it by using net banking ASBA or UPI ASBA or you can also contact refer to this page https://stockwatch.co.in/how-to-invest-in-ncd/ for making an application for an NCD IPO. If you are thinking to buy it from an existing investor through stock exchanges then you should know some of the basic points as follows.
1. You should know the security type of debenture.
2. You should know the redemption or maturity date of the debenture.
3. You should have knowledge of the interest payment date.
4. You should have the knowledge of interest record date because without knowing this you can’t decide on the buying date. Knowing the interest record date is important because if you are not holding the NCDs in your Demat account on the interest record date then you will not be eligible to receive the interest on the interest payment date.
Here we can easily get all the issue-related details in the tranche prospectus of the company and in the Shelf Prospectus or Draft Prospectus of the company.
You can also know more about NCD buying by watching this video playlist on YouTube (Hindi language)
If you have any doubts then feel free to ask in the comment section.
Sunny Seth - Admin Comment April 12, 2023, 9:59 p.m.
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