Non-Convertible Debentures: Meaning, Examples and Types

Non-Convertible Debentures (NCDs) are debt instruments that provide fixed interest and cannot be converted into equity shares. Companies use them to raise funds and are suitable for investors seeking steady income with lower risk, especially when issued by companies with strong credit ratings.

Imagine a company wants to expand but doesn’t want to give away ownership. Instead of issuing shares, it raises money by offering Non-Convertible Debentures (NCDs). These are loans from investors who promise to pay fixed interest and return the money after a specific time. NCDs are a safe option for investors seeking stable income without taking equity risks. They're widely used in corporate financing and debt markets.
Understanding how NCDs work is essential in finance, especially for investment banking, corporate finance, and portfolio management roles. Learning this through online finance courses can give you a strong foundation in debt instruments, risk assessment, and investment planning—skills highly valued in today's financial industry.

To build a strong foundation in financial instruments like Non-Convertible Debentures and Convertible Debentures, explore these free online finance courses. Ideal for beginners, these courses help you understand key concepts and open doors to career roles in finance and investment.

Table of Content

• Non-Convertible Debentures Meaning
• Types of Non-Convertible Debentures
• Features of Non-Convertible Debentures
• How to Purchase Non-Convertible Debentures?
• Factors to Consider Before Investing in NCDs

Non-Convertible Debentures Meaning

Non-Convertible Debentures (NCDs) are financial instruments companies use to raise long-term funds. They offer fixed interest to investors over a specific period and repay the principal at maturity. 

Unlike convertible debentures, NCDs cannot be converted into equity shares, meaning investors don’t gain ownership in the company. These are ideal for those seeking stable and predictable returns. Credit agencies often rate NCDs, and secured ones carry lower risk, making them a preferred choice for conservative investors.

Example of Non-Convertible Debentures:

An example of a Non-Convertible Debenture is when a company like Tata Capital issues NCDs to raise funds. Investors receive regular interest but cannot convert it into company shares. They get back their principal at maturity. These are ideal for those seeking fixed returns without owning company equity.

Types of Non-Convertible Debentures

Non-convertible Debt (NCDs) are classified into various types based on their features, security, and traceability. Understanding these types helps investors choose the right option based on their risk appetite, return expectations, and investment goals. Here’s a quick look at the main types of NCDs.

1. Secured NCDs:

The company’s assets back these debentures. Investors can recover their money by claiming the secured assets if the company fails to repay. This reduces risk and makes secured NCDs safer. Due to their added security, they’re preferred by risk-averse investors and usually offer slightly lower interest rates compared to unsecured ones.

2. Unsecured NCDs:

Any specific company assets do not back these. In case of default, investors don’t have direct claims on the company’s assets. Hence, they carry a higher risk but offer higher interest rates to attract investors. Before investing in unsecured NCDs, it's important to check the company’s credit rating and financial history.

3. Listed NCDs:

Listed NCDs are traded on stock exchanges like NSE or BSE. This means investors can buy or sell them before maturity, providing liquidity. Prices may fluctuate based on market interest rates and company performance. They are ideal for investors who want flexibility and the option to exit early.

4. Unlisted NCDs:

Unlisted NCDS are not traded on stock exchanges, so investors must hold them until maturity. Though they may offer higher interest rates, unlisted NCDs have lower liquidity and higher risk. They're suitable for investors willing to stay invested for the full term.

Features of Non-Convertible Debentures

• Fixed Interest Rate:

Non-convertible debentures regularly provide a fixed interest rate, offering a steady income stream. This makes them attractive for investors looking for predictable returns over a specific period.

• No Equity Conversion:

These debentures cannot be converted into equity shares. This means investors do not gain ownership in the company or voting rights, unlike convertible debentures that offer shareholding benefits upon conversion.

• Credit Rating:

NCDs are rated by agencies like CRISIL or ICRA based on the issuer’s creditworthiness. A higher rating indicates lower risk and helps investors make informed decisions before investing.

• Fixed Maturity Period:

These debentures have a specific tenure, often ranging from 1 to 10 years. The principal amount is returned to investors at the end of this fixed maturity period.

• Secured or Unsecured:

Non-convertible debentures may be secured against company assets or unsecured. Secured NCDs carry lower risk, while unsecured ones offer higher interest but have a greater chance of default.

• Market Liquidity (if Listed):

Listed NCDs can be traded on stock exchanges like NSE or BSE, allowing investors to sell before maturity if they need access to funds.

• Limited Liquidity (if Unlisted):

Unlisted NCDs are not traded on exchanges and must be held until maturity. This limits investor flexibility and may not suit those seeking short-term investment options.

How to Purchase Non-Convertible Debentures?

To buy NCDS, you need a demat account and trading account with a registered broker. NCDs can be purchased through public issues (when companies open them for subscription) or from the secondary market if they’re listed on stock exchanges like NSE or BSE. Before investing, check the credit rating, interest rate, tenure, and whether they are secured or unsecured. Always read the offer document carefully.

Factors to Consider Before Investing in NCDs

1. Credit Rating:
   The credit rating of an NCD reflects the issuer’s ability to repay the principal and interest. Ratings by agencies like CRISIL, ICRA, or CARE provide insight into the default risk. Higher-rated NCDs (like AAA) are safer investments, offering lower risk and returns, while lower-rated ones may offer higher returns but carry a higher risk of default.
2. Interest Rate:
   NCDs offer fixed interest, which can be paid periodically or accumulated. Compare interest rates across NCDs before investing. While higher interest rates may seem appealing, they often come with increased risk. Choose an NCD that offers a balanced return while considering the credit rating and risk involved.
3. Type of NCD – Secured vs Unsecured:
   Secured NCDs are backed by company assets, offering more security in case of default. They’re ideal for risk-averse investors. Unsecured NCDs, on the other hand, are riskier as assets don’t back them, but they typically offer higher interest rates. Assess your risk tolerance before making a decision.
4. Liquidity (Listed vs Unlisted):
   Listed NCDs are traded on stock exchanges, offering liquidity if you need to sell before maturity. Unlisted NCDs, however, are not tradable and must be held until maturity. If you need flexibility, investing in listed NCDs may be a better option, but if you are looking for long-term stability, unlisted NCDs might be a good choice.
5. Tenure of Investment:
   The tenure of an NCD refers to its maturity period, which can range from a few years to more than a decade. Longer-tenure NCDs often provide higher interest rates but tie up your money for a longer period. Choose a tenure that aligns with your financial goals, ensuring liquidity when needed.
6. Tax Implications:
   Interest earned from NCDs is subject to taxation based on your income tax bracket. Additionally, if you sell listed NCDs before maturity, capital gains tax may apply. Be aware of the tax consequences of your investment to understand your post-tax returns better and make informed decisions.

Conclusion

Non-Convertible Debentures (NCDs) are valuable investments for those seeking fixed and stable returns without equity exposure. Commonly used in corporate finance, they offer predictable income and lower risk, especially when secured and highly rated. Learning about NCDs through online finance courses can help investors make informed, goal-aligned decisions and diversify their investment portfolio wisely.