Non Convertible Debentures (NCD)
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
Convertible Debentures:
·
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.
Features
· 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.
Things to
consider:
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
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