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NCD IPO Explanation

 

NCD IPO Explanation

NCD or Non-Convertible Debentures are considered as the fixed income instruments that are widely utilized by the companies in order to raise the long-term capital from the public. As the name suggests, these type of debentured cannot be converted into shares. NCD offer have a fixed rate of return to the investors for a fixed time period.

Key Points of Non-Convertible Debentures
  1. NCD can range its maturity period from the tenure of 90 days to 10 or even 30 years.
  2. The collected money through NCD is the part of the capital structure of the firm. The collected amount is a part of the share capital in case of the equity shares.
  3. A liable company won’t be able to convert this instrument to the equity shares as it is already specified before the launch.
  4. NCD provides the higher rate of returns as compared to the convertible debentures and fixed deposit.
  5. The companies receive the issue rated by the credit rating companies before issuing it. This is done to earn the trust of the investors. Higher the rating higher the company’s capability to pay debts on time and the default risk is lower and vice versa.

NCD is the process by which a corporate raise the NCD funds through the public. The process is very similar to the equity IPO (Initial Public Offer) of the private limited companies. One of the major differences in Equity IPO and NCD public issue is the bidding of NCD that stops as soon as it gets completely subscribed. The allotment of NCD is based on the first come first serve basis in NCD IPO.

Types of NCD’s

The Non-Convertible debentures are divided into two types on a major level.

  1. Secured NCD: These types of NCD provides an assurance on the repayment up to some extent if the company default. They are comparatively on the safer side with the secured instruments.
  2. Unsecured NCD: These type of NCD provide higher rate of returns than the counterpart. The unsecured NCD may involve higher risk over the repayment when a company default.

One of the important differences between the secured and the unsecured NCD is that the former is supported by the various company assets. When a company defaults, then the investor can easily claim money by the asset liquidation process.

NCD Credit Rating

Whenever a firm goes to raise the money by NCD then it is compulsory to get its credit done. The Credit rating agencies such as ICRA, CRISIL ad Fitch, etc. It simply analyses the companies and provide them the rating on creditworthiness. Higher the rating higher the creditworthiness of the issuer.

No company with a credit rating of AAA has ever defaulted but when it comes to the companies with lower rating than AAA then the percentage increases automatically.

NCD Exit Options

NCD’s has higher liquidity than the FD’s as they are listed on the stock exchanges for trading.

Some NCD’s must have a put or call options to exit. The investor can redeem the NCD before with a call option before its maturity. With the Put Option, the investors can sell their debentures to an issuer before maturity at a predefined price.

Applicable Taxes

The taxes that investor has to pay depend on the holding time of NCD. There is no tax deducted at Source (TDS) on NCD’s.

  1. If the customer choses to stay with the non-convertible debentures till maturity. The gain will be included with the income and then he will pay have to pay the according to the respective tax slab. As a result, for the investors holding highest tax slab the post-tax returns from the non-convertible debenture are lower.
  2. To redeem the bond within the tenure of 1 year the customers will have to pay the Short-term Capital Gains (STCG) tax as per the tax slab in which you fall.
  3. To make investment over a year but redeeming it before maturity, then he will have to pay the Long-term Capital Gains (LTCG) tax at 20% with indexation and 10% without indexation.
NCD Interest Rate

It offers a higher rate of return than the fixed deposit of five-years and more as it comes to NCD interest rate in India. Interest rates may get affected by various factors:

  1. Types of NCD: The NCD’s that are insecure with a higher rate of return over the second ones. Higher the interest rates, higher the risk along with it. It is wise to access the returns and the risks before investing in an NCD.
  2. NCD provides several options to take pay out on the yearly, quarterly, monthly, weekly and on the cumulative basis.
  3. An individual must remember that higher the interest rate higher the risk along with it. Before investing in an NCD, it is wise to access returns and risks. In the cumulative option interest is accumulated and then paid on maturity. The investors that invest with the aim of achieving the financial goal instead of the regular income then the cumulative option is a good choice.

Before purchasing an NCD, it is very important to give a check on the credit rating, NCD types, the rate of returns, applicable taxes and the exit options. All the factors are considered effective an NCD further helps to make an informed decision.

NCD vs FD (Fixed Deposit)
Parameters NCD’s Fixed Deposits
Issuing Entities Corporates Bank and Corporates
Interest Rate NCD’s typically that offer 2 to 2.5% higher returns than the bank FDs at any time
RoR (Rate of Return) RoR is 2 to 2.5% higher in NCD than FD
Tax Deduction at Source NA Only applicable if the gain increases ₹40,000 in a year.
Liquidity Low High
Maturity Period 3-10 years 7 days to 10 years
Applicable taxes STCG and LTCG Tax The interest is taxable as per the tax slab.
Parameters NCD’s Fixed Deposits Issuing Entities Corporates Bank and Corporates Interest Rate NCD’s typically that offer 2 to 2.5% higher returns than the bank FDs at any time RoR (Rate of Return) RoR is 2 to 2.5% higher in NCD than FD Tax Deduction at Source NA Only applicable if the gain increases ₹40,000 in a year. Liquidity Low High Maturity Period 3-10 years 7 days to 10 years Applicable taxes STCG and LTCG Tax The interest is taxable as per the tax slab.
NCD Issues Open in India 2020
Sr. No Company Name Issue Open Issue Close Issue Size - Base (Rs Cr) Issue Size - Shelf (Rs Cr) Rating
1 Urja Global 14-Jan-2020 15-Jan-2020 Rs.5 3.27 Cr  
2 Muthoottu Mini Financiers NCD 20-Jan-2020 12-Feb-2020