Debentures are of two types Convertible and Non-Convertible. The convertible debentures are the ones that can be converted into equity shares at a later time. This convertibility provides attraction to the investor but yield lower interest rates. Non - convertible debentures does not convert into equity shares thus can yield a higher interest rate.
An NCD can be Secured or Unsecured. Secured NCDs are backed by the issuer company’s assets to fulfill the debt obligation unlike unsecured NCDs.
Additionally, NCDs may have Put or Call options. If a company issues a ‘Callable Bond’, it means that it can be redeemed by the Issuer (company) before the bond’s maturity. The issuer can call away the bond if it is issued in a high interest rate environment and the rates fall subsequently. A bond with a ‘Put option’ works in exactly the opposite manner, wherein the investor can sell the bond to the issuer at a specified price before its maturity if the interest rates go up after the issuance and the investor has other, higher-yielding investment options.
Public Issue: During the public issue of the bonds, you can invest in them by submitting a physical form furnishing the details as requested. Also, you can make an investment online through your Demat Account.
Secondary Market:NCDs bonds are listed on NSE or BSE or at times on both after the Public Issue. You can invest in these bonds through your trading account like the way you invest in shares. (But do note that NCDs have liquidity risk. Even if NCD get listed, low volumes can deprive investors of any opportunity in exiting prematurely.)
You have to provide PAN details to the issuer of NCD.
NRIs can invest in NCDs provided the company issuing NCDs allows them to invest in it.
How to select best NCD bonds? Below are the important factors that need to be considered before investing in a NCD public issue.
Credit Rating: Credit rating of an NCD is a third party assessment of the quality of bond in terms of its credit performance. Some of the leading credit rating agencies in India are CRISIL, ICRA, and Fitch. It is advisable to buy NCD which have good Credit Rating. These ratings can be AAA (good rating), AA+, AA & AA-. Lower the rating, higher would be the interest rate.
Coupon Rate: The rate of interest offered by the issuer of NCD is called Coupon. Companies which carry higher risk give higher interest rate than others to lure investors for investment. There can be various options for interest pay-out such as monthly, quarterly, half yearly or annually. However, most NCDs offer annual and cumulative pay-out.
Credibility of the Issuer / Promoter: Before investing in NCDs, it is advisable to look at company’s financial health and end of use funds. Analyse the reason for raising the money from the markets. Check rating of companies which gives an idea of safety of your investment.
Additional Features: Some NCD public issues offer special rate of interest to Senior citizens or to shareholder. So, you may buy some shares and then invest in the NCD issue to get special interest rate. You have to provide your shareholding details in the application form.