If you are exploring safe, fixed-income investment options in India, you may have come across the term non-convertible debentures. These are a popular way for companies to raise funds while offering investors steady interest income. Let's break down what non-convertible debentures are in simple words, their key features, types, and a basic non-convertible debentures example to help you understand how they work.

What Are Non-Convertible Debentures?

In simple terms, non-convertible debentures are a type of debt instrument issued by companies to borrow money from the public for a fixed period. They are called "non-convertible" because they cannot be converted into equity shares of the company at a later stage. Instead, investors receive regular interest payments and the principal amount back on maturity. These instruments are regulated by SEBI and are commonly used by well-established businesses to raise long-term funds.

Features of Non-Convertible Debentures

The main features of non-convertible debentures make them attractive to people looking for stable returns:

Fixed Interest: Investors receive the fixed interest rate (known as "coupon") on a regular basis, which could be monthly, quarterly, or annually.
Fixed Tenure: NCDs have a specific maturity period, often ranging from a few years to over a decade.
Secured or Unsecured: Many NCDs are backed by the company's assets, providing an additional layer of security.
Credit Ratings: Independent rating agencies provide ratings that help investors gauge the issuer's creditworthiness.
Liquidity: Listed NCDs can be traded on stock exchanges, allowing early exit if needed.

Types of Non-Convertible Debentures

A proper understanding of the different types of non-convertible debentures can be helpful before making a decision:

Secured NCDs: Backed by company assets, they provide some additional cushion of safety.
Unsecured NCDs: Not backed by identifiable assets and therefore are somewhat riskier; however, they may have higher interest rates.
Callable NCDs: The company has the right to call these NCDs before maturity.
Puttable NCDs: Empowering investors with the right to ask the company to redeem the NCD before maturity.

There is an NCD type for every investor's need, whether it be secured, flexibility, or yield higher rates.

How to Buy NCD Online?

Today, purchasing NCDs is quite straightforward. If you're wondering how to buy NCD online, you can do so through your trading account linked to a depository participant. During the public issue period, you can apply online using your trading account and a linked bank account. Once allotted, the NCD units reflect in your holdings, and you start receiving interest as per the schedule.

Non-Convertible Debentures Example

Here's a simple non-convertible debentures example to make it clear:
Imagine a reputed Indian company wants to raise ₹100 crore for expansion. Instead of taking a bank loan, it issues NCDs with a 5-year tenure and an annual interest rate of 8%. You invest ₹1,00,000 in these NCDs. Every year, you receive ₹8,000 as interest. At the end of five years, the company repays your principal of ₹1,00,000.
This predictable income and repayment structure make NCDs appealing to conservative investors.

Benefits and Considerations

Though NCDs provide a better interest rate than a standard fixed deposit, it is important to assess the financial stability of the issue and the credit rating of the underlying company. The advantage of issuing debt via stock exchanges is that they give liquidity and flexibility to exit the investment. Prices can still fluctuate, to the extent that there is demand for the stock.

Conclusion

Non-convertible debentures can be a useful part of a diversified portfolio for investors seeking fixed, predictable returns. By understanding the features of non-convertible debentures, knowing the types of non-convertible debentures, and learning how to buy NCD online, you can make informed decisions suited to your financial goals. Always check ratings and terms before committing funds.

For those who want to explore the listed NCD opportunities, you can use the trading services of Indiabulls Securities Limited (formerly Dhani Stocks Limited) to transact within the framework of SEBI regulations.