Non Convertible Debentures (NCDs) – Eligibility

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What are Non Convertible Debentures (NCDs)?

Non-Convertible Debentures fall under the debt category. They cannot be converted into equity or stocks. NCDs have a fixed maturity date and the interest can be paid along with the principal amount either monthly, quarterly, or annually depending on the fixed tenure specified. They benefit investors with their supreme returns, liquidity, low risk and tax benefits when compared to that of convertible debentures.

Who Can Invest in NCDs

Category I (Institutional Category)

  • Public Financial Institutions, Statutory Corporations, Commercial Banks, Co‐operative Banks and Regional Rural Banks which are authorized to invest in NCDs.
  • Provident Funds, Pension Funds, Superannuation Funds and Gratuity Fund, which are authorized to invest in NCDs.
  • Venture Capital Funds and/or Alternative Investment Funds registered with SEBI.
  • Insurance Companies registered with IRDA.
  • National Investment Funds.
  • Mutual Funds.

Category II (Non Institutional Category)

  • Companies; bodies corporate and societies registered under applicable laws in India and authorized to invest in the NCDs.
  • Public/Private Charitable/Religious trusts which are authorized to invest in NCDs.
  • Scientific and /or industrial research organizations; which are authorized to invest in the NCDs.
  • Partnership firms in the name of partners; and
  • Limited Liability Partnership formed and registered under the provisions of the LLP Act, 2008 (No.6 of 2009).

Category III (Individual Category)

  • Resident Indian Individuals.
  • Hindu Undivided Families through the Karta

Who is not eligible to Invest?

The following categories of persons, and entities, shall not be eligible to participate in the Issue and any Applications from such persons and entities are liable to be rejected:

(a)Minors without a guardian *;

(b)Foreign nationals, Non‐Resident Indians (NRI) inter‐alia including any NRIs who are (i) based in the USA, and/or, (ii) domiciled in the USA, and/or, (iii) residents/citizens of the USA, and/or, (iv) subject to any taxation laws of the USA;

(c)Person resident outside;

(d)Foreign Institutional Investors;

(e)Foreign Portfolio Investors;

(f)Qualified Foreign Investors;

(g)Overseas Corporate Bodies; and

(h)Person ineligible to contract under applicable statutory/regulatory requirements.

Things Investors should consider

NCDs are vulnerable to risks related to handling business and funding. Hence, the credit rating can take a hit if the turnover is negatively impacted. The company will have to borrow additional funds from banks or NBFCs to counterbalance the impact. Hence, it is advised to keep a few things in mind before opting for a company NCD.

Credit Rating of the Issuer:

Choose a company with an AA rating or above. Credit rating calculates the firm’s potential to raise cash from its internal and external operations and its sustainability. This is the best parameter that can reveal the financial position of the company.

Level of Debt:

Some background check on the asset quality of the company can go a long way for NCD investors. Do not invest if the company allocates more than 50% of its total assets towards unsecured loans.

Capital Adequacy Ratio (CAR):

CAR gauges the company’s capital and sees if the company has sufficient funds to survive potential losses. Ensure that the firm you plan to invest in has at least 15% CAR and have historically maintained the same.

Provisions for Non Performing Assets:

The company must keep aside at least 50% of their assets towards NPAs as this is a positive indicator of their asset quality. If the quality drops due to bad debts, take it as a red flag.

Tips for investing in NCDs

  1. Organisations resort to raising funds using NCDs only to meet a specific business purpose. Read the terms and conditions – if they do not offer you clarity on how/where your money is going to be used, do not invest.
  2. Diversification, i.e., investing across various firms and periods can reduce the risks considerably. 
  3. NCDs from one single sector (NBFCS that focuses on personal loans) are not safe to invest in. This can lead to higher risk exposure.
  4. NCDs from the secondary markets have always delivered higher returns in the past. This is when you buy older NCDs when a firm issues a new one. 
  5. Never go by the interest rate alone. It will not matter if the NCD yield (that decides your real returns) remains low. 
  6. The perfect time to sell your NCD is when its interest is due. It is the prime trading time for a non-convertible debenture. You can expect to make more money out of it.