Non-Convertible Debentures

Non-Convertible Debentures

Subject – Economy

Context – Several companies, including IIFL Home Finance, India bulls Housing Finance and Edelweiss Financial Services, have announced public issues to raise funds through non-convertible debentures, offering interest rates between 8.25–9.7%.

Concept –

• Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer.
• Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner.
  • The debentures which can’t be converted into shares or equities are called non-convertible debentures (or NCDs).
• Non-convertible debentures are used as tools to raise long-term funds by companies through a public issue.
• To compensate for this drawback of non-convertibility, lenders are usually given a higher rate of return compared to convertible debentures.
• Besides, NCDs offer various other benefits to the owner such as high liquidity through stock market listing, tax exemptions at source and safety since they can be issued by companies which have a good credit rating as specified in the norms laid down by RBI for the issue of NCDs.
• In India, usually these have to be issued of a minimum maturity of 90 days.
• The major players in the NCD market are housing finance companies, gold loan companies and non-banking financial companies (NBFCs) which found it a good avenue for funds with the decline in interest rates in the system.
  • Apart from retail investors, banks, mutual funds and insurance companies also invest in 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.