From UPSC perspective, the following things are important :
Prelims level : Non-convertible Debentures
Mains level : Not Much
Several companies have announced public issues to raise funds through non-convertible debentures.
What are Debentures?
- 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.
What are NCDs?
- 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.
Benefits offered by NCDs
- 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%.
- 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.