To raise cash over time, a corporation can issue debentures. Debentures may or may not be convertible depending on the terms. More debt is convert to equity. Let’s examine the definition of non convertible debentures along with types, features and distinctions between convertible vs non-convertible debentures.
Debentures are a type of long-term debt instrument that a company can issue to investors in order to raise funds. Their interest rate is fixed for a particular period of time. A firm can issue convertible or non-convertible debentures. Debt instruments are convertible into firm equity. In contrast, NCD provide this option.
Non Convertible Debentures Definition
Non convertible debentures (NCDs) are unsecured debt commitments. In a nutshell, NCDs are financial instruments that cannot be convert to stocks or equity by the firm that issued them. Large firms sometimes issue these to raise capital, but investors cannot convert them into shares. Investors must rely on the issuer’s creditworthiness and credit agency ratings. These ratings help investors assess the creditworthiness and future prospects of the issuer.
The rate of interest on NCDs is fix. Interest is payable monthly, quarterly, semiannually, or annually, depending on the terms agreed upon at the time of issuance. At the maturity of the investment, the investor will get both principal and interest. NCDs, like convertible debentures, provide more liquidity, less risk, and better tax status.
Convertible Debentures vs. Non-Convertible Debentures
Investing in convertible and NCDs offers a variety of benefits based on their qualities. Several of these are discussion in greater depth below about convertible debentures vs. non convertible debentures.
Conversion
At any time, the issuer of convertible debentures may convert the debt into equity shares. Non-convertible bonds cannot ever be convert to common stock.
Status
Because convertible debentures can be change into equity shares, their holders have dual status. Consequently, an investment may function as both a creditor and a shareholder. Non-convertible debenture holders can only act as creditors within the corporation.
Interest Rate
Because holders of convertible debentures can convert them into equity shares, interest rates are reduce. Investors like non-convertible debentures because of their higher interest rates.
Market Conditions
In the event of a market risk, convertible debentures may be convert into common stock. In contrast, non-convertible debentures are redeemable only upon reaching maturity.
Maturity
The value of convertible debentures is based on the company’s stock price. Investors may anticipate greater returns when stock prices are high. In contrast, non-convertible bonds have a predetermined maturity value and offer a fixed rate of return.
Types of Non Convertible Debentures
There are two types of non convertible debentures. Let us understand in more details below.
Secured NCDs
The Secured NCD is the safest alternative because it is back by corporate assets or other collateral. If the company fails to pay the agreed-upon amount on time, investors may be able to recuperate their losses through the sale of the company’s assets. However, the interest rates on these NCDs are quite low.
Unsecured NCDs
Unsecured NCDs are riskier than secured NCDs, because they are not back by the company’s assets. The investors will be require to wait until they are fully pay back if the company is unable to repay them. The corporation has no assets to use for debt repayment. In other words, the firm pays these shareholders after it pays secured NCD holders. In addition, the interest rate on these NCDs exceeds that on Secured NCDs.
Features of Non Convertible Debentures
Non convertible debenture instrument has lot of qualities. Let us understand the features of non convertible debentures below.
Liquidity
NCDs must be list on a stock exchange in order for their liquidity to improve. Consequently, investors can buy and sell NCDs at any moment in the secondary market. This is essential since it allows you to save money in case of an emergency.
Taxation
NCD is subject to the same taxation as debt. If the NCD is sold prior to the expiration of the three-year period, the STCG is tax at the investor’s usual rate. If the investor sells the NCD after three years, he will be subject to a 20 percent index-able long-term capital gains tax.
Interest Rate
A non-convertible debenture yields a higher rate of interest than a fixed deposit (FID). Unsecured debentures often carry a higher rate of interest. They can choose to pay interest monthly, quarterly, semiannually, or annually, providing them more freedom. Moreover, they provide a cumulative payout option.
Credit Ratings
The company issuing NCDs must contact credit rating organizations like as CRISIL, CARE, ICRA, and others in order to get ratings. It evaluates the creditworthiness and ability to pay creditors and shareholders of a business.
A company with a high credit rating is more likely to fulfill its obligations, whereas a company with a poor credit rating is more likely to default. In this situation, the rating agency will reduce the issuer’s rating.
Tenure
NCDs might be effective anywhere between 90 days and ten years. Investors can choose between short- and long-term NCDs depending on their objectives.
Subscription
During the public offering period, investors can purchase NCDs within a specified time frame. Additionally, they are tradable on a stock exchange, allowing investors to purchase them through licensed brokers.
Conclusion
NCDs are a type of fix-income security issue by corporations with strong credit ratings in order to capitalize on long-term capital appreciation. The interest rates on these options are higher than those on convertible debentures. This discussion is intended to help you comprehend types of non convertible debentures meaning, features and distinction between convertible vs non-convertible debentures.
