We covered some basics about the Non-Convertible Debentures (NCDs) in the first part of this series. Now, let us see how we can buy NCDs.
There are two options. We can buy NCDs in the secondary market on the exchanges or we can subscribe to the NCD IPOs.
Minimum investment amount is typically Rs 10,000 for IPOs – which is quite low, enabling a larger set of investors to invest into these types of assets.
NCD Issuance Process
The process of issuing NCDs in India is quite detailed and involves several steps:
- Drafting the Prospectus: The company intending to issue NCDs drafts a prospectus detailing the terms of the issue, the purpose of raising the funds and the company’s financial details. This document is submitted to the Securities and Exchange Board of India (SEBI) for approval. Some broad pointers to check are: overall debt of the company, capital adequacy ratio, interest coverage ratio, NPA handling etc.
- Credit Rating: The company obtains a credit rating for the NCDs from a recognized credit rating agency. The minimum credit rating for NCDs in India is P-2 of CRISIL or an equivalent rating by other agencies. Generally, a company with an AA rating or above is considered investment grade.
- Application: Once the prospectus is approved by SEBI, the company opens the issue for subscription. Investors can apply through their broker.
- Subscription: The allotment is based on a first-come, first-serve basis. The bidding stops as soon as the issue is fully subscribed.
- Demat Account: The NCDs are credited to the investor’s demat account.
- Payment: The money gets deducted from the investor’s trading or bank account.
- Listing: NCDs are tradable instruments and are listed with major stock exchanges (BSE and NSE) in India.
Taxation
The interest income from NCDs is taxed under the head “Income from Other Sources” and is taxable as per the income tax slab of the investor. If NCDs are sold within a year, Short Term Capital Gains (STCG) will be applicable as per the income tax slab rate. If we sell after a year but before the maturity date, Long Term Capital Gains (LTCG) will be applicable at 10%. One important point to note is that – NCDs held in Demat form are exempted from TDS.
Trading NCDs
NCDs cannot be withdrawn before maturity like FDs. However, all Non-Convertible Debentures (NCDs) issued through Initial Public Offer get listed on the capital market segment of both the exchanges.
Since they are listed on the stock market they can be sold in the secondary market if one needs to cash out before maturity.
The liquidity and activity in the secondary market of NCDs is often good. They may trade at a discount or premium to the face value, depending on market conditions. One must note that they are often subject to volatile price movements in the secondary market due to market dynamics.
What happens at maturity?
Now, please note that NCDs are typically issued at par, meaning the issue price is the same as the face value of the debenture. The face value is the amount that gets returned to the investor at maturity.
So for example, if we purchased one NCD at Rs 10,000 in 2020 which matures in 2025. On the redemption date we will get back the same Rs 10,000.
In this case, there is no role of market volatility. Maturity amount is pre-fixed.
Why NCDs are buzzing nowadays?
Since the indexation benefit of debt mutual funds is removed, investors are looking out for more options in the fixed income category. That’s why we have been witnessing a huge interest in NCDs for some time now.
As the business activities pick up pace in the current positive environment for entrepreneurship in India, we may see a deeper market for them going forward. So, stay tuned!
Disclaimer: The above content is for informational & educational purposes only. Not advice. Please consult your financial advisor before investing.
