Non-convertible debentures (NCD)

Non-convertible debentures (NCD)

Context: Future Consumer firm has an interest obligation of Rs 13.89 crore, due on NCDs upto November 15, 2020, remains unpaid, raising fears of new defaults.

Concept:

• Debentures are one of the long-term financial instruments issued by companies to borrow.
• It is different from “Share” which is the capital (representing the ownership of the shareholders) of the company, but Debenture is the debt of the company. The income earned on shares is the dividend, but the income earned on debentures is interest.
• NCDs are debentures with a feature of convertibility into shares after a certain point of time at the discretion of the debenture holder.
• The debentures which cannot be converted into shares are called non-convertible debentures (or NCDs).

Types of debentures

• There are two types of NCDs-secured and unsecured.
• A secured NCD is backed by the assets of the company. If the company fails to pay the obligation, the investor holding the debenture can claim that through liquidation of those assets.
• Unsecure non-convertible debentures have no backing even if company defaults.