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Non Convertible Debentures – What are NCD in India ?

by Manish Chauhan · 62 comments

We recently saw few Non convertible Debentures coming into market like Shriram Transport Finance NCD, Muthoot Finance NCD and Manappuram Finance NCD. A lot of investors wanted to invest in these NCD’s and many did. But does each of the investors understand what NCD is and how it works? What are the risk factors associated with NCD in India? Let’s look at it…

Non convertible debentures (NCD) in India

To understand non convertible debentures, it would be a good idea to understand convertible debentures first. As the name says convertible debentures are those debentures which are converted to normal equity shares after a specified term. Till that time these debentures earn regular income in form for interest but once they are converted to equity shares, they are just like normal shares.

Hence non convertible debentures (NCD’s) are those debentures which are not convertible to equity shares. NCD in India more or less work like company fixed deposit, where you are lending a company to get some interest income and your money back after few years. You need to check the rating of that bond. Such debt bonds are normally rated by credit rating agencies like CRISIL. A good rating indicates reasonable assurance of safety and return of principal as well as interest.

Non convertible Debentures can be secured or unsecured

A NCD can be a secured NCD and unsecured NCD.

 Secured Non convertible Debentures (NCD) are backed up by some assets which can be liquidated for paying off the bond holders incase something goes wrong. For this reason, the returns on secured NCDs are lower than unsecured NCDs. See a discussion on Tata Capital secured NCD on our forum

Unsecured Non convertible Debentures (NCD) are the ones which are not backed by any assets and incase company is in financial crunch, there can be an issue in paying back the bond holders. Only after the payment is made to every entity which has some security, the unsecured NCD bond holders have any chance of getting back their money. So that’s the reason why these NCD’s have high interest rates.

The transparency in NCD is another issue, a lot of companies have come up with NCDs to raise capital, but a common man does not have time and ability to study the NCD and how safe it would be. Look at the following comment:

Can an NBFC disburse all the money it raises? Investors also do not know how much the company has borrowed. The only document for analysis is a (dated) balance sheet. In addition to public offerings, NBFCs constantly tap the ‘private placement’ market for debt. So investors don’t know the total debt burden. There was a subsidiary of India Infoline which raised money through the NCD route. How could investors know that the proceeds were going to be utilised for a subsidiary? In the 1980s, there was a craze for fixed deposits from leasing companies, thanks to high interest rates and fancy incentives paid to investors and intermediaries. The lure was the promised rate of return and not credit quality. The same herd mentality is on display now. At some point, there will be some defaults. – via moneylife

Features of NCD’s

  • They are listed on stock exchanges. Hence, provides liquidity to holder.
  • The tenure of NCDs can be anywhere between 2 years and 20 years.
  • NCDs are rated by rating agencies such as CRISIL.
  • If you buy a NCD that pays interest then the interest will not attract TDS
  • The debentures are generally offered in four options: monthly, quarterly, annual and cumulative interest

Taxation on NCD

Taxation on NCDs is just like debt funds. If you sell your debentures before a year, the profits will be added to your income and you will pay taxes at the same rate as per your income tax slab. But for any profit made by selling it after a year, you will pay tax of 10%, if indexation is not done, or 20% if the indexation is done.

Did you invest in any NCD ? Did you knew how NCD worked ?

ncd in india

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{ 62 comments… read them below or add one }

1 sunil October 24, 2011 at 4:20 pm

With all due respect, the so called credi rating agencies are all working under the footsteps of Multi National companies, i remember reading and article from a person who actually predicted the 2008 downfall, not exact downfall but the reasons behind it. They say, credit rating agencies, and people who are trust worthy are given huge HUGE sums of money just to boast of any Bonds/Mortagage Loans to sell into market. Hence never ever just go by credit rating agencies mark…. who knows, next day it cah put the same company into the VERY HIGH RISKcategory.
You study your self the company financials, understand your needs of actually why you are trying to put your money into that company NCD and act upon.

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2 Manish Chauhan October 25, 2011 at 7:08 pm

Sunil

Yes .. agree with you .. credit ratings are one of the factors , there is atleast some thing one can take out of it , at the end one has to study NCD’s themselves if one is serious about investing

Manish

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3 VENKATA SUBBAIAH.P.C. December 7, 2011 at 7:05 am

Dear All,

I advise you all you can happily place your deposits by way of NCDs in Manappuram finance limted as this company’ s 90%business is only giving loans against gold ornaments and is offering good rate of monthly interest like 12% monthly interest without any problem and you can close the same at any time prematurely.

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4 basanagouda September 6, 2013 at 4:50 pm

please give me advise issue of ncds for monthly interest plans

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5 Dev October 25, 2011 at 1:51 am

I think there exists a window of opportunity to create a financial product. which can be a sort of derivative with an underlying assets of a secured NCD. Though I am not sure about the benefits of the same.
Or may be I am thinking like those US I-Bankers who created the infamous Weapons of Mass Destruction called as ‘derivates and CDS’ :-)

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6 Manish Chauhan October 25, 2011 at 6:51 pm

Dev

If one has to make derivatives only ,then why not just go for FMP’s , they are the best example of derivative product (in a way)

Manish

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7 bemoneyaware October 25, 2011 at 10:00 am

Good article explaining in detail what NCDs are. Didn’t understand much hence did not invest. But does it make sense to invest in NCD? Would appreciate if you can clarify on when it would make sense to invest in NCD.

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8 Manish Chauhan October 25, 2011 at 6:50 pm

Bemoneyaware

It would make sense to invest when a person is clear about the risk and would like to take that risk for a higher return , as simple as that .

Manish

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9 bemoneyaware October 26, 2011 at 4:34 am

Thanks for replying. Wanted to know: Can we compare NCD to Fixed Deposit? If yes how?

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10 Manish Chauhan October 26, 2011 at 1:30 pm

Bemoneyaware

Yes and no .. depends on how you want to compare them ,. FD is totally secure while NCD have some risk and for that reasons NCD’s give higher rate of return .. Its simple

Manish

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11 Ruchika October 29, 2011 at 12:02 pm

FDs are not totally secure.. they are secure only upto Rs 1 lakh investment.

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12 Manish Chauhan November 5, 2011 at 4:45 pm

Yes i know .. However its nearly secure to 100% .. Though they are insured upto 1 lac , but thats a different thing .. SBI and other nationalised banks, do you think they can fail ? and if they do , dont you think they will be bailed out ?

Manish

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13 pasulas October 27, 2011 at 4:47 pm

Ha Manish, thanks for a very crisp informative article on NCD. Also under the features of NCDs, u have mentioned they are traded on stock exchange and hence provide liquitidy, but in the beginning of the post u have mentioned they are nonconvertible and hence non tradeable on stock exchange, please correct me if i am wrong.

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14 Manish Chauhan November 5, 2011 at 5:45 pm

Pasulas

Where did I say that they are non-tradable ? stock exchanges also have non-equity instruments like bonds etc for trading :) .

Manish

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15 Puneet October 28, 2011 at 3:02 pm

With much of personal experience investing into NCD I suggest please be very careful with these instruments.
Most of the private banks do keep coming up with these types of NCDs with some “exotic spices” added. e.g kick-off, market linked , lower and upper levels etc etc.
Another thing to note is that near the term of your NCD maturity, banks would do their best to buy these NCDs from you off market. They’ll just not let them mature in your hands. Huge marketing pressure etc etc. They do this by telling you that it’s for your own interest and save your tax. If you sell these NCDs before maturity, it’s a capital gain, else it’s a income. And it’s partially true also. But have not understood the bank’s vested interest in doing so.

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16 Manish Chauhan November 5, 2011 at 5:49 pm

Puneet

Thanks a lot for that information , its really a very rich information :) . So It must be true with other similar instruments like bonds and infra bonds

Manish

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17 Ruchika October 28, 2011 at 6:25 pm

Good one.. found a good set of articles as well on recent NCDs.. checkout: http://www.theinvestmentworld.com/category/fixed-income/ncd/

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18 Vinaya H S October 31, 2011 at 5:14 am

There was one more recently from Religare. Got to know of it through an email marketing campaign. Wrote about it @ http://www.vinayahs.com/archives/2011/10/04/break-my-fixed-deposit-youve-got-to-be-kidding-me/

And here’s my take on whether you should invest (or not!) in such schemes: http://www.vinayahs.com/archives/2011/10/27/should-you-invest-your-money-in-companycorporate-fixed-deposits/

Generally, I’d stay away from them.

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19 Manish Chauhan November 5, 2011 at 5:50 pm

Vinaya

Thanks for your views .. I take it as your personal view and agree to them to some extent .

Manish

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20 rohit March 21, 2012 at 7:14 pm

If i have invested Rs 50000 in muthoot finance for 3 years then what amount i will get after 3 years.Please explain me.

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21 Manish Chauhan March 21, 2012 at 7:26 pm

Rohit

It would depend on the your interest rate ,what is yours ?

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22 Pushkin June 6, 2012 at 7:24 pm

L&T Finance have come up with a buy back option for their NCDs : http://www.ltfinance.com/ncd.aspx . Is it wise to sell them in the market or to go for buyback option?

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23 Manish Chauhan June 7, 2012 at 10:53 pm

This question is best suited for forum : http://www.jagoinvestor.com/forum

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24 Joginder August 9, 2012 at 1:58 pm

can you please let us know, if someone has bought these ncds, how we can sell the debentures?

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25 Manish Chauhan August 10, 2012 at 6:16 pm

Are they traded in secondary market ? If not, then you cant sell them before maturity !

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26 Joginder August 11, 2012 at 8:42 am

they are actually muthoot fincorp debentures…..and i don’t know whether they are traded in secondary market…….now can u tell me whether i can sell them or not? Also, in the receipt there is an option : option put waived till 400 days…..what does this mean?

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27 Manish Chauhan August 12, 2012 at 10:00 am

Seems like that are traded http://www.bseindia.com/cirbrief/new_notice_detail.asp?noticeid=%7BB9E181DB-4C77-4C09-8002-3C5435E747A2%7D&noticeno=20120120-10&dt=1/20/2012&icount=10&totcount=12&flag=0

But only if they are in demat form and only if there is enough liquidity , someone should be ready to buy it from you in order to sell it !

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28 Animesh Maji August 16, 2012 at 2:42 pm

My question is Secured Non Convertible Redimable Debenture is fully secured?

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29 Manish Chauhan August 17, 2012 at 1:14 pm

Animesh

Yes .. almost ! , you have the first right of getting the money from company if things go wrong with company and they are bankrupt !

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30 Vishu Singh August 31, 2012 at 1:55 am

Hi mohit sir! I want to invest 50000 rupees either in FD or in NCD. I m confused. Please suggest which one should i go through?

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31 Manish Chauhan August 31, 2012 at 9:37 am

What is your risk appetite and goals ?

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32 Vishu August 31, 2012 at 10:23 pm

Sir, i m a student. 50000 is my mother’s savings. I dont know anything about the NCDs bt i can take 50-50 and my goal is to lots of money through shares

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33 Manish Chauhan September 2, 2012 at 9:12 pm

Vishu

This is not a plan . Do you know how to make money through shares ? Dont over estimate it , 99% people loose money in stocks , better not bet it on stocks and keep it in FD for now . Learn about investing for 1 yr

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34 Vaibhav September 15, 2012 at 5:30 pm

Manish,
Am I correct in saying that mechanics of Tradable NCDs work similar to Bonds? Meaning if interest rates fall, their prices will rise, thus resulting in capital appreciation?

Also issuers of these NCDs such as Shriram Transport highlight that they are not subject to TDS (when in demat form). But we still have to pay tax on them, by manually adding this income to our tax calculation, correct? If so, then what’s the advantage of not being subject to TDS, I mean why do issuers highlight this as if its an advantage for the investors? Ultimately one has to pay tax on this income.

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35 Manish Chauhan September 17, 2012 at 10:35 am

Vaibhav

But sometime there can be investors whose income from these NCD’s are not above the taxable limit and they dont have to pay income tax , but if TDS is there, then they have to claim it back by filing returns, also for those who wants to do tax evasion, “No TDS” is like saying “You are free to pay it yourself or not pay it by yourself, we are not cutting it from our end” .

Manish

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36 Vaibhav September 17, 2012 at 9:55 pm

Thanx!

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37 piyush September 19, 2012 at 9:48 pm

of the present NCD on sale which are secured and which are not, which would you consider worth investing

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38 Manish Chauhan September 22, 2012 at 2:12 pm

It should be discussed at our forum – http://www.jagoinvestor.com/forum/

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39 Ashish Bajpai October 4, 2012 at 7:22 am

Hi Manish

I want to invest in NCD of Muthoot finance my question is if i am buying NCD of 5 lakh for 5 yrs with monthly interest payout. After 5 yrs will i get my whole amount which i invest and what are the risk on that

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40 Manish Chauhan October 4, 2012 at 5:50 pm

Ashish

The risks are already talked about in this article, are you not clear about them ?

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41 avneet kaur October 17, 2012 at 10:49 am

Hi.. As per my knowledge, Long term capital gain on NCDs are taxed @ 10% without any indexation benefit. You may also refer to recent IIFL NCD prospectus. Kindly clarify on if indexation benefit is present or not. I have one more doubt if i am required to pay STT on selling NCD in secondary market or not. Kindly clarify.. Thanks

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42 Manish Chauhan October 19, 2012 at 9:50 am

Seems that true .. here a good article from Manshu on this http://www.onemint.com/2011/08/30/how-is-tax-on-ncds-calculated/

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43 avneet kaur October 26, 2012 at 4:30 pm

Thank u….

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44 sreeram.more October 30, 2012 at 6:45 pm

Hi,

Can u post a few instances of NCD Defaults?

Regards

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45 Manish Chauhan November 2, 2012 at 11:47 am

Ask it on our forum – http://www.jagoinvestor.com/forum/

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46 avijit November 15, 2012 at 12:16 pm

sir, please aware me the basic deference of Reedemable Preference Share (RPS) and Registered Non Convertiable Secured Debenture. And which of those instrument is much secured.

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47 Manish Chauhan November 15, 2012 at 7:13 pm

Avijit

You should open a discussion thread on our forum http://www.jagoinvestor.com/forum/

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48 Inder November 23, 2012 at 11:25 am

One company based of West Bengal issuing Secured Redeemable Non Convertible Debentures in private placement. Company is not listed in Sebi and having no rating. Company is 3 years old. Company is saying they have permission from MCA. but till now giving all maturities in time. Is it safe to invest in it ?

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49 Manish Chauhan November 25, 2012 at 11:17 am

Depends on few things like

1. Is it really registered ?
2. What is the offer they are making ?

If it was not registered , I would personally not deal with it !

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50 niraj March 24, 2013 at 9:30 pm

dear manish I had same query . I read ur reply ‘where we will look the company is registered or not’ & what type of registration is need to be a leagle and secure company. if a company shown in mca website certificate of mortgage for Rs. 10 crore, can we invest in its secure redeemable nonconvertible debenture .
THANKS

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51 Manish Chauhan March 27, 2013 at 12:16 pm

look at ratings and mca website , learn about its balance sheet if possible

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52 Kalyan Koley April 24, 2013 at 12:05 pm

Sir,
My question is has Muthoot Finance Ltd any authority to sell Debentures in Private Placement? so far does my knowledge go. Private Placement Debentures can never be sold to more than 49 heads and is it believable that Muthoot Finance Ltd, with its 4500 branches in India (they claim it) has sold only 49 Private Placement Debentures since the inception or they have procured some special permission from the MOC or the RBI or the Govt. of India? I have invested Rs 50000/ with this company on good faith that they must have had a permission, but upon questioning the officials of the company one Mr Frederick (I don’t know his designation) told me that he had no knowledge of the permission by any governmental agencies.
With regards,
Kalyan Koley

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53 Manish Chauhan April 26, 2013 at 11:32 am

I think you shoudl discuss it on forum so that others can put their views – http://www.jagoinvestor.com/forum/

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54 Roshni July 12, 2013 at 5:57 pm

Thank you for the article.

I was told of Shriram Transport NCD by my agent. When I tried to find other NCD’s on the net (which is how I came to this article :) ), I could not find any info.

How do I know of NCD’s coming into the market? It seems that timing is very important as the good / safe ones get oversubscribed quickly.

Regards
Roshni

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55 Manish Chauhan July 15, 2013 at 1:11 pm

NCD come into market as and when companies come with it .

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56 Chhaya S. July 31, 2013 at 3:31 pm

Dear Manish,

My mom has invested some amount in not so known company Uro Agro India Ltd., which is registered in Kolkata but now collecting money from Mumbai as well. It is in the form of Non Convertible Secured Debenture and they are paying interest in cash every month regularly till date.

Now, I have come to know that this company is fraud and black listed by Ministry of Corporate Affairs. I want to get money back (the maturity is 9 years) prematurely. I have contacted company via mail but I have received no response, local agents flatly denied as it is for 9 years.

How can I get my money back, can you suggest some way out.

Thanks in advance,

Chhaya S.

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57 Manish Chauhan July 31, 2013 at 5:03 pm

the next step for you should be registering a POLICE complaint !

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58 devendra sarda September 29, 2013 at 5:05 pm

What Is the tax treatment of Cumulative NCD? Suppose I Purchase 100 NCd of Rs. 1000 each and after 6 years I get 2000 Rs. Per NCD from company? How It will be taxed? And suppose after 2 years I sell NCD for Rs. 1300/- Per NCD in secondary market How taxed in this case?

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59 Manish Chauhan September 30, 2013 at 8:40 am
60 devendra sarda September 30, 2013 at 9:06 am

Manish,
With due respect , Youe answer to my query regarding cumulativ NCD seems to be wrong,because Indexation benefit isn’t available in case of NCD as per section 112 of Income tax act. Anyway my query is whether I should show my interest income/ capital gain income year wise or total income will be taken at the time of maturity or selling NCD at secondary market and under witch head CG/ or Income from other sources.

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61 Manish Chauhan September 30, 2013 at 9:17 am

Yes, it was my mistake

Long term capital gains from NCDs are always taxable @ 10.30 per cent (including education cess of 3%) without indexation. I think you should open a thread to discuss on your topic at our forum, which will attract more people to put their views – http://www.jagoinvestor.com/forum/

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62 Milli September 29, 2014 at 2:59 am

Hi Manish

We are intending to invest in NCD of 7 lakhs in Kosamattom Finance ltd, which promises a return profit of 14 lakh after 5.5 yr. I read your article and from what i’ve understood, a good rating for the company can be trusted for such investments.

I wish to know certain things like …1) Is KF Ltd a good rated cooperation and how to find out its ratings? KF ltd is not registered in SEBI but is registered under RBI.
2) Should we put this amount in secured debunture or unsecured NCD’s?
3) What are the ways of getting the balance sheet of the company as you had mentioned.

4) Is there partial secured NCD’s and are they better alternatives than the other two?
For example …… Incase of an NCD where a total of 5.5 yr included 39 months of secured NCD’s combined with the remaining 27 months of unsecured NCD, can you suggest what is the amount paid in return with respect to any bankruptcy or adverse state for an amount of 7 lakhs ?

Your suggestion would give me an insight into this and looking forward to your reply

Milli

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