How Do NCDs Work?
When you invest in an NCD, you are essentially lending money to the issuing company. The company pays interest at predetermined intervals (or on maturity for cumulative options), and at the end of the investment tenure, returns the principal amount. Since many NCDs are listed on stock exchanges, investors may also sell them before maturity, subject to market conditions and liquidity.
Credit Ratings
Before issuing NCDs, companies are required to obtain credit ratings from recognized rating agencies such as CRISIL, CARE, ICRA, or Fitch Ratings.
A credit rating indicates the issuer's ability to repay its debt obligations:
Higher Rating (AAA/AA): Lower default risk and higher credit quality.
Moderate Rating (A/BBB): Moderate level of risk.
Lower Rating: Higher risk with potentially higher returns.
Investors should always consider the credit rating before investing.
Key Features
Fixed Returns: Offers a predetermined rate of interest throughout the investment period.
Stock Exchange Listing: Most NCDs are listed, allowing investors to buy or sell them before maturity.
Flexible Tenure: Investment periods generally range from 2 to 15 years.
Interest Payment Options: Available as Monthly, Quarterly, Half-Yearly, Annual, or Cumulative interest payout options.
Demat Holding: Issued and traded in electronic (Demat) form.
No Equity Conversion: Cannot be converted into company shares.
Professional Credit Rating: Mandatory credit assessment before issuance.
No TDS on Interest: Interest on listed NCDs is generally paid without Tax Deducted at Source (TDS), though the interest remains taxable in the hands of the investor as per applicable income tax laws.
NCDs
Non-Convertible Debentures (NCDs) are fixed-income debt instruments issued by companies to raise funds from investors for a specified tenure. Unlike convertible debentures, NCDs cannot be converted into equity shares. In return, investors receive a fixed rate of interest, and upon maturity, the principal amount is repaid along with the applicable interest.