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Basics of Non-convertible Debentures (NCD) – HDFC Securities

Read basics of Non-convertible Debentures (NCD) at HDFC Securities that can make your investing program easier and safer.

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Basics of Non-convertible Debentures (NCD) – HDFC Securities

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  1. What is a NCD? Non-convertible Debentures (NCD) are debt instruments with a fixed tenure issued by companies to raise money for business purposes. Unlike convertible debentures, NCDs can’t be converted into equity shares of the issuing company at a future date. Features of NCDs ¾ NCDs are listed on Stock Exchanges. ¾ Issuance and Trading will be in Demat form only. ¾ Interest will be paid through Direct Credit / ECS / RTGS / NEFT mode. ¾ A good credit rating is required for the company to issue a NCD. Who Should Invest in NCDs? ¾ Investors who expect a stable consistent return with least risk. ¾ Investors who want to have consistent monthly returns. ¾ Fixed Deposit Investors can look at NCD’s to improvise their returns. ¾ Investors looking at portfolio diversification with the Fixed Income security. Benefits of investing in NCDs ¾ Better Returns: NCD’s provide a higher rate of interest for their investors. ¾ Good Liquidity: To sell NCDs, investor has two options. o Sell on the Stock Exchanges. o Exercise the Put /Call option. Tax Implications ¾ No Income Tax is deductible at source as per the provisions of Sec 193 of the IT Act. ¾ The interest will be taxable in the usual course as per the income tax slab of the investor. Common Terms used in NCDs ¾ Coupon Rate: The interest rate payable to the investor.

  2. ¾ Face Value: The nominal value of a NCD stated by the issuer. ¾ Redemption: The return of an investor’s principal. ¾ Market Value: The last reported sale price. ¾ Yield: The annual return on an investment expressed as a percentage. What is Put Option in a NCD? A “put” option means that the investor has an option to surrender the debenture if he wants to, and get back your principal. A put option gives a lot of flexibility to the investor – if interest rates go up, and he can get better rates from the market. He can exercise the put option and get back the money and invest it elsewhere. What is Call Option in a NCD? A “call” option means that the company has an option to ask the investor to surrender the debenture, and pay back the principal to you. A call option gives flexibility to the company – if interest rates go down, and the company can get funds at lower rates from the market, it can exercise the call option and give the money back and can raise money from the market at lower rates.

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