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Non-Convertible Debentures decoded: Steady returns, zero complications

Non Convertible Debentures (NCDs) are a unique investment choice for consistent and predictable earnings. NCDs have set interest rates and cannot be converted into equity shares. 

This article delves into the world of NCDs, exploring their benefits, risks, and why they have become a noteworthy choice in the realm of investments.

What are Non-Convertible Debentures?

The NCD full form is Non-Convertible Debentures. Corporations often use debentures, financial instruments with set interest rates and tenures, to raise public finances. 

These instruments serve as a means to raise capital. Some debentures can be converted into equity shares at maturity, whereas others are non-convertible. Unlike their convertible counterparts, NCDs lack the provision for conversion into equity shares. Instead, NCDs return the debenture holder principal and interest at maturity.

NCDs are long-term loan products that enable companies to raise financing. NCD investors pay the issuer for a set time. The issuer agrees to make interest payments periodically, i.e. semi-annually or annually. 

Non-convertible debentures (NCDs) can be divided into secured and unsecured. Debenture holders can liquidate corporate assets if secured NCDs default. Conversely, unsecured NCDs lack this collateral protection. NCD issuers must have credit ratings from CRISIL, ICRA, CARE, and Fitch.

A higher rating (e.g., CRISIL AAA or AA-Stable) indicates strong debt-servicing capability and lower default risk. Conversely, a lower rating implies higher credit risk.

Benefits of NCD investment

  1. Steady returns: NCDs deliver a reliable income stream with fixed interest rates, which makes them a steady-paying option for investors who seek stability in their investments.
  2. Competitive interest rates: NCDs offer higher rates of interest when compared to conventional fixed-income avenues like bank fixed deposits.
  3. Diversification: They facilitate portfolio diversification within the fixed-income asset class by allowing investors to spread their risk across various issuers and industries.

Risks of investing in NCD

Interest rate risk: Interest rate risk is a significant concern when investing in NCDs. With set interest rates, these products provide steady interest income throughout the investment period. 

NCDs are sensitive to changes in rates of interest in the market. After investing in NCDs, market interest rates may climb, making your fixed interest rate less appealing than higher rates.

Credit risk: Default risk, another name for credit risk, is a crucial consideration when investing in NCDs. It concerns the issuer’s capacity to pay interest and refund principal at maturity.

NCDs issued by financially strong and reputable organisations are generally considered safer investments.

Liquidity risk: Liquidity risk is also a factor to be considered when investing in NCDs. These instruments are typically less liquid compared to stocks and more traditional bonds. NCDs have restricted trading volumes and may not be marketable before their maturity date, unlike equities.

Investors who need their cash before the NCDs mature may have trouble selling them in the secondary market. This might mean selling at a discount or waiting until maturity for the principal.

Difference between non-convertible bonds and non-convertible debentures

Factors of differenceNCD bondNCD Debentures
StructureThese are tradable debt instrumentsThese are loans with fixed rates of interest and have set repayment schedules
IssuanceOften issued through public offeringsIssued through private placements
Interest rateInterest rates may vary based on market conditionsThese are loans with fixed rates of interest and have set repayment schedules.
LiquidityMore liquid traded on stock exchangesLess liquid often held until maturity

How to buy debentures?

Given below are the steps to buy debentures in India:

  1. Get a Demat account: The Investor should create a demat account with any registered depository participant.
  2. Select debentures: After researching their terms, choose the debentures you want to buy.
  3. Open a trading account: The next step would be to open an account with a government-certified stock broker.
  4. Fund trading account: Deposit funds into your trading account for the debenture purchase.
  5. Place an order: Use your trading account to place an order specifying quantity and price.
  6. Payment: Once your order is executed, funds get debited from your trading account.
  7. Confirmation: Receive a contract note as proof and see debentures in your demat account.
  8. Management: It is necessary to keep a keen eye on your investments and adjust accordingly.

Non-convertible debentures example

Aditya Birla Finance Limited, Muthoot Finance Limited,  Edelweiss Financial Services Limited, Kosamattam Finance Limited and Indiabulls Housing Finance Limited have filed their draft prospectus with SEBI for issuing Non-Convertible Debentures.


Investing in NCDs can be profitable for investors seeking fixed-income instruments. NCDs provide greater interest rates than bank deposits, making them tempting for income. 

Before investing in NCDs, investors must evaluate their risk tolerance, financial goals, and issuer creditworthiness. They offer consistent interest income and capital preservation, but they also involve credit and interest rate risk. 

Diversifying an investment portfolio and consulting a financial advisor might help one make an educated selection depending on their financial goals.


What are the returns on non-convertible debentures?

Compared to convertible debentures, the returns on non-convertible debentures (NCDs) are usually better. Market forces impact the interest rate provided, which in turn affects the real rate of return. The decreased risk associated with secured NCDs allows them to offer greater interest rates compared to unsecured ones.

What are the risks of non-convertible debentures?

Default risk occurs when the issuer of a non-convertible debenture (NCD) is unable to satisfy its payment commitments. Interest rate risk, caused by fluctuations in market rates, is another thing that might affect them. Interest rate risk and a decline in NCD value are two potential downsides of selling your holdings too soon.

What happens to NCD on maturity?

All interest and principal on Non-Convertible Debentures (NCDs) are repaid by the issuer when the debts mature. There is no end date and interest is paid forever on irredeemable NCDs because of their permanent nature.

Can we break NCD before maturity?

No, it is not possible to redeem Non-Convertible Debentures (NCDs) prior to their maturity date. The secondary market allows for the sale of NCDs before maturity, nevertheless, because they are listed on the stock market.

What is the maximum tenure of non-convertible debentures?

Ten years is the usual upper limit for the term of secured Non-Convertible Debentures (NCDs). Companies involved in infrastructure projects and infrastructure financing organisations, on the other hand, are authorised to issue debentures for a period of up to thirty years.

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