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.<\/p>\n\n\n\n
In this article, we shall closely look at the\nissuance of non-convertible debentures (NCD) and the applicability of various\nlaws.<\/p>\n\n\n\n
After\na period of time, some debentures can be converted into shares at the\ndiscretion of its owner. The debentures that cannot be converted into shares\nare known as Non-Convertible Debentures. They are regarded as fixed income\ninstruments and are issued by high rated companies to accumulate long term\ncapital appreciation<\/a>.<\/p>\n\n\n\n NCD’s\nare used as tools to facilitate long term funds by companies through public\nissue therefore lenders are generally given a higher rate of return in\ncomparison to convertible debentures.<\/p>\n\n\n\n NCD’s\ncan be issued by a corporate. It can be eligible to issue NCD only if it\nfulfils the following conditions:-<\/p>\n\n\n\n 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<\/p>\n\n\n\n The total amount of NCD’s issued\nby a corporate shall be within the limits approved by the Board of Directors of\nthe corporate or the quantum indicated by the CRA (Credit Rating Agency) for\nthe rating granted, whichever is lower.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The main features of NCD’s are as follows:<\/p>\n\n\n\n One of the attractive things that stand out in favour of NCD’s is the interest\nrate that it offers. Unsecured NCD’s give higher returns than compared to\nsecured NCD’s. This is because unsecured NCD’s have no underlying asset to give\nvalue to the debentures. This makes it risky and therefore higher returns are\npromised. Interest is paid through Direct Credit \/ NEFT\/ECS \/ RTGS mode. <\/p>\n\n\n\n There are different kinds of debentures with different maturities. RBI\nhas stipulated that the maturity must not be less than 90 days. Maturities\nrange from 90 days to as long as 10 or even 30 years.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n One can sell debentures in the secondary market<\/a> before maturity if it is\nlisted.<\/p>\n\n\n\n Returns on non-convertible debentures are taxed as income. There is no\ntax deduction at source (TDS) if you invest through the DEMAT mode. Income tax\non the interest income will have to be paid at the time of declaring one’s\nincome.<\/p>\n\n\n\n Following\nare the roles and responsibilities of Corporate and Debenture Trustees:<\/p>\n\n\n\n Applicable Provisions include Section 71 of the\nCompanies Act, 2013 with Rule 18 of the Companies (Share Capital and\nDebentures) Rules, 2014. The procedure is as follows-<\/p>\n\n\n\n If\na person is looking for an investment that produces fixed income, then non-convertible\ndebentures can be an ideal investment. It offers higher rates of interests as\ncompared to FD’s (Fixed Deposits), postal savings etc. There are many other\nbenefits of investing in NCD’s. It is the most common method of raising loan\ncapital at lower rates than banks.<\/p>\n\n\n\nWho can issue Non-convertible Debentures?<\/h2>\n\n\n\n
Maturity<\/strong><\/h2>\n\n\n\n
The\nAmount and limits of Issue of NCD’s<\/strong><\/h2>\n\n\n\n
What\nare the features of Non-Convertible Debentures?<\/h3>\n\n\n\n
Returns<\/strong>–<\/h3>\n\n\n\n
Maturity<\/strong>–<\/h3>\n\n\n\n
Risk<\/strong>–<\/h3>\n\n\n\n
Liquidity-<\/strong><\/h3>\n\n\n\n
Tax-<\/strong><\/h3>\n\n\n\n
Procedure for issuance of Non-Convertible Debentures<\/h3>\n\n\n\n
Roles and Responsibilities of Corporate and Debenture\nTrustees<\/h2>\n\n\n\n
Other General Procedures:<\/h2>\n\n\n\n
Issuance of Debentures under the Companies Act,\n2013<\/h3>\n\n\n\n
Conclusion<\/h3>\n\n\n\n