A Comprehensive Guide to Non Convertible Debentures (NCDs) in India

Non Convertible Debentures <(NCDs) have gained traction as a fixed-income investment instrument in India, primarily due to their attractive interest rates and relatively stable returns. They are the debt instruments issued by corporations to raise capital without diluting equity. Read on to learn more about the intricacies of NCDs, types, benefits, risks, and regulatory framework governing them in India.

What are Non Convertible Debentures?

Understanding NCD’s in India

NCDs are debt instruments that companies issue to raise capital. They cannot be converted into equity shares of the issuing company. They get issued for a fixed tenure with fixed interest rates, and hence the returns are regular. Typically, firms with high credit ratings issue NCDs, and they are considered safer investments.

Let us understand NCD investments better with an example. Suppose a well-established company, XYZ Ltd., wants to raise funds for expansion. Instead of issuing equity shares, which would dilute ownership, XYZ Ltd. decides to issue NCDs. The company offers NCDs with a tenure of five years and an annual interest rate of 8%. Investors who purchase these NCDs lend money to XYZ Ltd. and, in return, receive an 8% interest annually. At the end of the five-year period, investors will get back their principal amount along with the accrued interest.

XYZ Ltd. has a high credit rating, which assures investors of the company’s capability to repay the debt. The NCDs are listed on a stock exchange, allowing investors to sell them in the secondary market if they need liquidity before the five-year term ends.

Types of Non Convertible Debentures

1. Secured NCDs<: These are backed by the company’s assets, providing an added layer of security to investors. In case of default, investors have a claim on the company’s assets.
2. Unsecured NCDs<: These are not backed by any collateral and hence are riskier compared to secured NCDs. But unsecured NCDs tend to come with higher interest rates.

Features of Non Convertible Debentures

• Fixed Interest Rates<: The interest rates that Non Convertible Debentures offer are fixed and higher than most conventional savings schemes, like bank fixed deposits.
• Tenure<: Tenure varies from a few months to several years, offering flexibility to the investor.
• Liquidity<: Since the NCDs are listed on stock exchanges, they can be bought or sold before their maturity, providing liquidity.
• Credit Rating<: NCDs are rated by credit rating agencies, denoting the creditworthiness of the issuer. Higher-rated NCDs are considered comparatively safe investments.

Advantages of Investments in Non Convertible Debentures

1. Higher Returns<: The interest rates for Non Convertible Debentures are mostly higher when compared with other fixed-income instruments like bank fixed deposits.
2. Regular Income<: Investors receive periodic interest payments, providing a steady income stream.
3. Diversification<: NCDs bring diversification to an investment portfolio and reduce overall risk.
4. Tax Efficiency<: Interest earned from NCDs is taxable, though some of the instrument types may have provisions exempting tax under certain conditions.

Risks Associated with NCDs

1. Credit Risk<: One major risk is the issuer’s chance of default. Before investing in an NCD, the investor should examine its credit rating.
2. Interest Rate Risk<: Change in market interest rates affects the price of NCDs. With the rise in interest rates, the market price of outstanding NCDs may decline.
3. Liquidity Risk<: While listed NCDs are quite liquid, unlisted NCDs are not readily saleable before maturity.
4. Inflation Risk<: As the rate of interest remains fixed, sometimes it may not be able to match up with the rate of inflation, hence the real value of returns may decrease with tim.

Regulatory Framework

The issue of NCDs and their listing is governed by the Securities and Exchange Board of India. The SEBI, under the (Issue and Listing of NonConvertible Securities) Regulations, 2021, has laid down the requirements for the issue of NCDs with stipulations for transparency and investor protection.

Key provisions

Disclosure Requirements

It is mandatory for the issuer to give detailed disclosures about the financial statement, risk factors, and purpose of the issue in the offer document so that the same is available to the investors for making relevant investment decisions.

Credit Rating

An NCD has to be compulsorily rated by a credit rating agency of some repute. This credit rating considers the creditworthiness of the issuer and hence, it helps the investors estimate the amount of risk involved.

Trustee Appointment

The appointment of a trustee by the issuer is mandated. This trustee acts as an intermediary between the issuer and investors. Trustees are supposed to ensure that the terms of issue of debentures are complied with by both parties.

Listing Requirements

It is only after compliance with specific listing requirements of the stock exchanges that the NCDs are allowed to get enlisted. This includes maintaining transparency in financial reporting and adhering to corporate governance norms.

Recent Amendments

SEBI continuously updates its regulations to address market dynamics and investor needs. Recent amendments have focused on enhancing transparency and improving market access for investors.

• Mandatory Listing

As of January 1, 2024, SEBI mandates the listing of all subsequent NCD issuances by entities with outstanding listed NCDs as of December 31, 2023. This move aims to facilitate better price discovery and liquidity in the secondary market.

• Investor Protection Measures

SEBI has introduced comprehensive guidelines for the Investor Protection Fund (IPF) and Investor Services Fund (ISF) to safeguard investor interests in the commodity derivatives segment

Market Trends and Outlook

The NCD market of India has grown in the recent past years due to the robust regulatory framework and rising participation from the retail segment. Demand for NCDs will increase as investors search for better returns in a falling interest rate scenario. Also, the reduction of minimum investment sizes has made NCDs more accessible to retail investors, further boosting demand.

Key Players

In India, key players in the Non Convertible Debentures (NCDs) market include a mix of financial institutions, non-banking financial companies (NBFCs), and large corporations. These entities regularly issue NCDs to raise capital, attracting both retail and institutional investors. Here are some of the prominent players across these categories:

1. Financial Institutions:

• State Bank of India (SBI): India’s largest public sector bank, issuing NCDs to manage liquidity and capital needs.
• HDFC Bank: Leading private sector bank issuing NCDs to bolster its capital base.
• ICICI Bank: Regular issuer of NCDs to support its funding requirements.

2. Non-Banking Financial Companies (NBFCs):

• Bajaj Finance: A well-known NBFC, regularly issuing NCDs with attractive interest rates for investors.
• Mahindra & Mahindra Financial Services: Part of the Mahindra Group, issuing NCDs for its vehicle financing and other services.
• L&T Finance Holdings: Issues NCDs to raise funds for its wide range of financial products.
• Shriram Transport Finance: Specializes in commercial vehicle financing and frequently raises capital through NCDs.

3. Large Corporations:

• Reliance Industries: India’s largest conglomerate, periodically issuing NCDs to raise funds for expansion.
• Tata Motors: Leading automobile company using NCDs to finance its capital requirements.
• Aditya Birla Group: Various companies in the group issue NCDs to support business growth.

4. Other Bond Placement Programs (OBPPs):

• Aspero: A leading platform for retail bond investments, offering a wide range of NCDs with predictable returns up to 14% and investment starting as low as ₹300.
• Wint Wealth: Specializes in alternative investment products like secured NCDs, providing retail investors access to high-yield, lower-risk bonds.
• Golden Pi: A digital platform for bond investments, offering NCDs and other fixed-income products to retail investors with easy access and minimal investments.

These OBPPs, along with established financial institutions, NBFCs, and large corporations, play a critical role in the NCD market, offering diverse options for investors seeking stable returns with varying risk profiles.

How can Aspero help with NCDs?

Aspero is a leading platform in India for investing in fixed income and Non-Convertible Debentures (NCDs), offering a wide range of specialized debt instruments. With Aspero, you can enjoy consistent and predictable returns of up to 14% with an investment as low as ₹300. As a SEBI-registered platform, Aspero ensures compliance and security for your investments. For more information, visit https://www.aspero.in/

Conclusion

Though there are risks involved, choosing NCDs based on credit rating and the reputation of the issuer may reduce the risks involved and prove to be a safe investment option. With the ongoing development of the Indian financial market, NCDs are certainly going to be one of the most favoured investment options for retail as well as institutional investors.