Non-Convertible  Debentures- Can  Investors  afford  to ignore?



Investors at large , quite often find it difficult or rather in dilemma as to how smartly and profitably  park their surplus funds keeping in mind Safety, Liquidity and Profitability. This often leads to a dilemma when the bank interest rates are falling like a pack of cards, inflation rate going up unabated, some of the NBFCs failing to service their debts, some MFs rolling over their commitment of Fixed Income maturity  periods (like Kotak, HDFC recently), more and more shell companies coming to surface  et al.

Despite the Share market index is touching new highs day in and  day out, Investors are cagey to invest in  shares. As one successful Entrepreneur stated ,” The greatest risk in life is not taking any Risk”, a small percentage of  our surplus  say 20-30 % could be invested in well-known companies with track record.

Quite recently many Companies have come out with offer letters for  “Non Convertible  Debentures’ (NCDs) offering attractive rate of Return (ROI), much better than bank and Post office deposits.  These NCDs are essentially  debts or loans for a medium to long term. While these deposits are technically unsecured in nature (in financial parlance), the NCDs are  mostly secured although  unsecured too are in vogue. But one special and specific advantage of such NCDs would be their compulsory rating being  done by authorized rating agencies like CRISIL, ICRA, CARE, Fitch etc., The rating agency  is supposed to thoroughly analyses and evaluate the capability of such issuing companies in the perspective of their  ability to service and repay their debts as per the commitment being made by them say 3 years and above, with cumulative interest payment or periodical payments like quarterly or half-yearly.  The Rating being given like AAA. AA+, AA- etc  are good for investment from the point of view of  safety and risk.

These NCDs are not converted into shares like  Fully and partly convertible debentures. These funds are normally utilized for Business development, new products launching, expansion geographically, diversification or acquisition of a new company or business etc., While issuing NCDs a certain legal charge would be created against the specific assets of the Company which are considered as collateral for the NCDs. In case of any financial problems emerge the company would sell the charged assets and repay the bond holders.  In case of  unsecured NCDs, the remedy will of course be worse than the disease as no collateral would be available for sale and disbursement and such unsecured NCD holders will get only after satisfying secured  debtors. The Interest from NCDs is of course taxable. The NCDs are listed sometimes and traded in the bourses in which case one  can opt  for liquidity by selling in secondary market  subject to  the Long term (10 %) or short term capital gain (15%) tax liability.

So invest in well known companies with track record and good investment rating!

So fill your Investment tub with diverse types of investments and avoid storing all your Eggs in a single basket!

Wish you all a  Smart, Profitable and  Strategic Investment  acumen!

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