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All That Is To Know About Non Convertible Debentures

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All That Is To Know About Non Convertible Debentures
Rajat Mishra - 10 June 2019

After Dewan Housing Finance, India’s second largest housing finance company (HFC) is likely to default on payment of Rs 1,150 crore non-convertible debentures (NCDs) due to liquidity crunch. But one thing that has kept people puzzled is what the Non –Convertible Debentures are. So we are here to explain you everything about Non Convertible Debentures in all you need to know about it.

What is Non-Convertible Debentures?

Basically, NCDs are debt instruments used by companies to raise long-term capital. Some debentures have a feature of convertibility into shares after a certain point of time. The debentures which cannot be converted into shares is called non-convertible debentures. In order to lure lenders, the companies offer higher rate of return in comparison to convertible debentures.

As they are long-term sources of funds, their maturity period can vary anywhere from 90 days to 2 years. It has a fixed tenure, which is pre-decided and a fundraising is done via a public issue.

Types Of NCDs

There are two types of NCDs: Secured and Unsecured. It is always advised to invest in a secured NCD as it comes with a host of benefits aside from being protected against the company assents. So, it is appropriate to say that a secured NCD is backed by the assets of the company. Incase a company fails to pay, the investor holding the debenture can claim it through liquidation of these assets.

But if a company defaults and fails to pay, this aforementioned option is not available at the disposal of the investor holding the unsecured NCDs. Also, in terms of hierarchy of repayments, secured debenture holders will be paid first and unsecured debenture holders will be paid from what is left after meeting obligations of secured debtors from the relevant sources.

How To Analyse Lower Default Risk

Any company seeking to raise money through Non convertible debentures has to necessarily get its issue rated by agencies such as CRISIL, ICRA, CARE, and Fitch Ratings. A higher rating means that issuer has the ability to serve debt on time and carries lower default risk.

For example, ICRA’s long term Rating Scale has 8 indicators such as AAA, AA, A, BBB, BB, B, C, D. Instruments with rating D are considered to have very high risk of default regarding timely servicing of financial obligation. And on the other hand, instruments with AAA rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lower credit risk. ICRA’s short term rating scale has five indicators such as A1, A2, A3, A4, D. D indicator here also indicates higher credit risk and A1 indicates lowest credit risk.

Interest Rates in NCD

NCDs offer high rates to investors. The average rate is between 11-12%. Most of these were secured NCDs. Also, companies which carry higher risk gives more than others to lure investors for Investment. NCDs get listed on stock exchanges where investors can sell it before maturity.

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