A Several companies have announced public issues to raise funds through non-convertible debentures.
Q What are Debentures?
A
Debentures are long-term financial instruments issued by a company for specified tenure with a promise to pay fixed interest to the investor.
They can be held by individuals, banking companies, primary dealers other corporate bodies registered or incorporated in India and unincorporated bodies.
Their types include:
Convertible debentures (CDs): They are a type of debentures that can be converted into equity shares of the company.
Non-convertible debentures (NCDs): They are defined as the type of debentures that cannot be converted into equity shares of the company.
Q What are NCDs?
A
Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner.
The debentures which can’t be converted into shares or equities are called non-convertible debentures (or NCDs).
They are debt financial instruments that companies use to raise medium- to long-term capital.
Q What are the benefits offered by NCDs ?
A
At a time when fixed deposit rates are in low single digits, these NCD offerings look lucrative.
NCDs offer interest rates between 8.25–9.7%.
Q What are the Risks posed ?
A
Although NCDs are generally considered safe fixed-income instruments, some recent defaults have made investors cautious.
NCDs can be either secured by the issuer company’s assets, or unsecured.
Certain issuers, with credit rating below investment grade, had in the past issued both a secured NCD and another unsecured one through the same offer document, with different credit ratings.
The risk is high in the case of unsecured NCDs, even though they offer high-interest rates.
Credit rating of the issuer is a key factor to consider before investing in any NCD.