Capital Markets: Challenges and Developments

What are Non-convertible Debentures?

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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:
  1. Convertible debentures (CDs): They are a type of debentures that can be converted into equity shares of the company.
  2. 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%.

Risks posed

  • 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.

 

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