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Investors prefer investment options that can manage liquidity and risks while giving substantial returns. Debentures are considered as long-term financial instruments that are issued by a company for a particular tenure with an assurance to pay fixed interests to the investors. There are two types of debentures: a) convertible debentures, b) no- convertible debentures.
In this article, we shall closely look at the issuance of non-convertible debentures (NCD) and the applicability of various laws.
Table of Contents
After a period of time, some debentures can be converted into shares at the discretion of its owner. The debentures that cannot be converted into shares are known as Non-Convertible Debentures. They are regarded as fixed income instruments and are issued by high rated companies to accumulate long term capital appreciation.
NCD’s are used as tools to facilitate long term funds by companies through public issue therefore lenders are generally given a higher rate of return in comparison to convertible debentures.
NCD’s can be issued by a corporate. It can be eligible to issue NCD only if it fulfils the following conditions:-
NCD’s would not be issued for maturities of less than 90 days or beyond the validity period of the credit rating of the instrument from the date of issue. The exercise date of option (put/call) attached to the NCD’s will not fall within the prescribed period of 90 days from the date of issue
The total amount of NCD’s issued by a corporate shall be within the limits approved by the Board of Directors of the corporate or the quantum indicated by the CRA (Credit Rating Agency) for the rating granted, whichever is lower.
The aggregate amount of NCD’s proposed to be issued shall be completed within the time period of two weeks from the date which the corporate opens the issue for the subscription.
The main features of NCD’s are as follows:
One of the attractive things that stand out in favour of NCD’s is the interest rate that it offers. Unsecured NCD’s give higher returns than compared to secured NCD’s. This is because unsecured NCD’s have no underlying asset to give value to the debentures. This makes it risky and therefore higher returns are promised. Interest is paid through Direct Credit / NEFT/ECS / RTGS mode.
There are different kinds of debentures with different maturities. RBI has stipulated that the maturity must not be less than 90 days. Maturities range from 90 days to as long as 10 or even 30 years.
High rated Non-convertible debentures generally exhibit lower credit risk. NCDs lose value when the interest rate in the system goes up and gain when the interest rate declines. However, when the NCD is held till maturity one is likely to realize the promised return and the risk due to movement in interest rates will not be there.
One can sell debentures in the secondary market before maturity if it is listed.
Returns on non-convertible debentures are taxed as income. There is no tax deduction at source (TDS) if you invest through the DEMAT mode. Income tax on the interest income will have to be paid at the time of declaring one’s income.
Following are the roles and responsibilities of Corporate and Debenture Trustees:
Applicable Provisions include Section 71 of the Companies Act, 2013 with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. The procedure is as follows-
If a person is looking for an investment that produces fixed income, then non-convertible debentures can be an ideal investment. It offers higher rates of interests as compared to FD’s (Fixed Deposits), postal savings etc. There are many other benefits of investing in NCD’s. It is the most common method of raising loan capital at lower rates than banks.
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Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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