Non Convertible Debentures

Companies and corporate need money for their business activities.

They can raise money from the public in the form of a loan (debt) or they can sell a right on their company by issuing equity shares.

Non-Convertible Debentures or NCDs are a form of raising money in the form of loan (debt).

They are debt securities - a type of investment product called fixed income instruments.

The company promises to repay the principal with interest on the said dates.

Impact of interest rates

Debt investors can use this feature to earn periodic coupon as well as gains from appreciation in price when interest rate moments are favorable.

On the other hand, adverse interest rate moments will lead to loss in value.

In such situations, they eat into the periodic coupon income earned on the security.

Further, NCDs are taxed according to the tax slab of the investors.

This will further make them less appealing.

Liquidity

In general, once invested in an NCD, the investor need to wait till maturity to get back his principal.

However, most modern, if not all debentures are listed and traded on the stock exchanges.

This means that, if your NCDs are in demat holding format, you can see them in your stock broker terminal and you can sell them on all traded days.

This means that NCDs now have liquidity.

Overall, the liquidity in the Indian bond market is low.

Because of lack of sufficient trading volumes, the liquidity might not much and you might have to take some cuts in case you wish to liquidate your investment.

So, even though the NCDs are listed, sellers might not be having that much advantage and have to depend on the mercy of buyers in case they wish to sell their NCDs.

Rating

All NCDs will carry a rating issued by a credit rating agency.

Generally AAA or above is safer.

However, credit rating agencies are often late in reporting a financial crisis in the company.

Hence, trust on credit rating is going down.

How to invest in NCDs?

What is the procedure to invest in NCDs .... where can we get the information for Cholamandalam NCDs having coupon rate 12.9 & 12.5%. Thanks

You can buy already listed NCDs or apply for those in NFO period using from your stock broker.

You can invest in an NCD by submitting a paper application form at the issue, with financial advisers or their agents.

Some stock brokers , such as ICICI Direct, provide online interface so that you can invest in them online.

However, considering the less brokerage income involved, not many brokers really offer them leaving out the traditional paper-application-form route to us.

You can locate the NCD application form on the Colamandalam website or from the Registrars website (Karvy is popular in this).

The 1-page application captures your basic information. So keep a Chq leaf and demat booklet handy when filling it.

After filling the form, keep a photocopy of your application form and filled in cheque leaf.

You can submit the form at your nearest Registrar office or at Cholamandalam offices. Do take acknowledgment slip (located at the bottom of the one-page application form.

Save you application number, cheque number and cheque date in your mobile phone for allotment tracking.

You can give a cheque towards the deposit amount. Interest will be paid to you to your bank account.

Once the allotment is over, you will get a certificate or a demat update for allotment mentioning appropriate units.

Remember returns from NCDs are taxable and will be equal to your tax slab (treated as interest income).

Disadvantages of NCDs

Question: Why I don't like NCDs / Disadvantages of an NCD (over say Debt funds)

1. NCD is a Deposit and returns for deposits are (almost always) taxable. NCD returns are taxable. Debt funds offer indexation benefit under long term capital gains

2. Liquidity: Not all NCDs can be sold whenever you want. Listed NCDs can be sold but you should have opted for that. Debt funds can be sold whenever you want money.

3. Diversification: Dependence on a single instrument is always a problem. What if the company in which we deposited could not make payment on time? While this is a rare possibility, debt funds counter this with diversification.

4. Offline: Most old NCDs are offline and cannot be transacted online. This means that you will have to give an offline paper request if you want to transact in it.

How are the corporate FDs (NCDs) as an avenue of investment?

In general, I avoid single instrument direct exposure to NCDs, Corporate FDs or such fixed instruments.

When a down grade happens, the typical retail investor will be last to get to know and act.

It is always good to diversify even within the asset class as well.

We can invest in a money market or a short duration debt funds which will invest in a basket of NCDs / Corporate FDs at a very small expense.

Are NCDs suitable to everyone?

NCDs are issued by individual companies.

Hence, we are locked to the financial performance of that company alone.

Small to moderate risk takers would probably consider debt mutual funds that provide diversification across several debt instruments and across several companies and there by reduce a risk.