Non-convertible debentures (NCDs) are fixed-income securities issued by companies to raise funds from investors. NCDs, unlike convertible debentures, do not have the opportunity to convert into equity shares of the issuing business at a later period. Instead, NCDs pay investors a predetermined rate of interest (coupon) over a set period, with the principle amount repaid at maturity.
Features of Non-Convertible Debentures
- Fixed Income: NCDs provide investors with a fixed rate of income, which is normally paid semi-annually or yearly for the term of the debenture. The fixed income feature offers investors a consistent cash flow stream and income stability.
- Non-Convertible: Unlike convertible debentures, NCDs are not convertible into equity shares of the issuing corporation. Investors simply get interest payments and the principal amount upon maturity, with no equity involvement.
- Credit Rating: Credit rating organizations assign credit ratings to NCDs based on their issuer’s creditworthiness and repayment capabilities. Higher-rated NCDs are seen less risky and often offer lower coupon rates, whilst lower-rated NCDs may offer higher coupon rates to compensate for higher credit risk.
- Tenor: NCDs have a set maturity time, which can range from a few months to several years, depending on the issuer’s financial needs and market conditions. Investors can select NCDs of varied tenors to suit their investment horizon and liquidity requirements.
Benefits of Non-Convertible Debentures
- Regular Income: NCDs provide investors with a consistent source of income in the form of fixed interest payments, making them ideal for income-driven investors looking for predictable cash flows.
- Diversification: NCDs provide investors with diversification benefits by exposing them to fixed-income instruments of various issuers, maturities, and coupon rates. Diversifying across NCDs can help to reduce credit risk and increase portfolio stability.
- Capital Preservation: NCDs provide principal protection because the issuer is contractually committed to repay the principal amount upon maturity. This feature makes NCDs less volatile than equities investments and more suited to conservative investors looking to preserve capital.
Risks of Non-Convertible Debentures
- Credit Risk: NCDs are susceptible to credit risk since the issuer may fail to make interest or principal payments owing to financial difficulties or bad market circumstances. Investors should consider the issuer’s creditworthiness and credit ratings before investing in NCDs.
- Interest Rate Risk: NCDs are sensitive to interest rate changes, with prices inversely tied to them. Rising interest rates may cause NCD values to fall, resulting in financial losses for investors that own NCDs in the secondary market.
Conclusion:
Non-convertible debentures are fixed-income instruments that provide investors with a steady source of income via fixed interest payments. While NCDs do not give equity ownership, they do provide capital preservation, consistent income, and diversification benefits to investors. However, before making an investment decision, investors should carefully analyze the credit risk, interest rate risk, and liquidity implications of NCD investments.
