What are non-convertible debentures and why are they issued?
A company can raise capital either by offering an ownership stake (equity) or by borrowing money (debt). Debt is primarily issued in the form of loans, bonds, or debentures.
Debentures are corporate debt instruments. Some may be converted into equity shares. Debentures that can’t be converted into equity shares are called non-convertible debentures (NCDs). NCDs offer higher returns than convertible debentures.
Corporates issue NCDs because it allows them to borrow from the market. The market interest rate may be more attractive than what banks have to offer. Additionally, the company may raise money without disrupting its equity structure.
Features of NCDs:
An NCD is similar to a company fixed deposit. Sometimes the issues are backed by assets making them more secure. They are an attractive investment option because they cater to a wide variety of needs. NCDs are available for every income requirement, investment horizon, and risk appetite. In addition, those that are traded on the exchange may even offer capital appreciation.
What should you look out for?
It’s important to select NCDs that are issued by companies with a healthy balance sheet, a high credit rating, and no history of defaults. Secured NCDs are safer. Since NCDs can have varying tenors it makes sense to select a range according to your investment objectives. NCDs that are listed on exchanges provide more liquidity. However, trading volumes are low and the issue sizes are not large. Ideally, this is meant for investors with larger sums of capital who are willing to take higher risks in the debt space.