Non-Convertible Debentures (NCDs)

Non-Convertible Debentures (NCDs) are long-term debt instruments issued by companies to raise funds from the market, carrying a fixed rate of interest and a specified maturity period, without any option of conversion into equity shares. In the context of Banking, Finance and the Indian Economy, NCDs constitute an important segment of the corporate debt market, providing companies with an alternative source of finance while offering investors relatively stable and predictable returns.

Concept and Meaning

A Non-Convertible Debenture is a type of debenture that represents a loan taken by a company from investors, with a contractual obligation to pay periodic interest and repay the principal at maturity. Unlike convertible debentures, NCDs do not grant the holder any right to convert the debt into equity, thereby preserving the ownership structure of the issuing company.
NCDs are generally issued for medium- to long-term financing needs such as expansion, refinancing of existing debt, working capital augmentation, or infrastructure development.

Regulatory Framework in India

The issuance and trading of NCDs in India are governed by regulations framed by the Securities and Exchange Board of India, which oversees investor protection, disclosure norms, and market transparency. Companies issuing NCDs must comply with detailed disclosure requirements regarding financial health, risk factors, and utilisation of funds.
In the case of banks and certain financial institutions, prudential exposure norms and investment guidelines are also influenced by directions issued by the Reserve Bank of India. Additionally, NCDs are issued under the provisions of the Companies Act, ensuring legal backing and enforceability.

Types of Non-Convertible Debentures

NCDs can be classified on various bases, reflecting differences in risk, return, and security structure:

• Secured NCDs: Backed by a charge on specific assets of the issuing company, offering relatively lower risk.
• Unsecured NCDs: Not backed by collateral, carrying higher risk and typically offering higher interest rates.
• Listed NCDs: Traded on recognised stock exchanges, providing liquidity to investors.
• Unlisted NCDs: Issued through private placement with limited liquidity.
• Fixed-rate NCDs: Carry a constant rate of interest throughout the tenure.
• Floating-rate NCDs: Interest rate linked to a benchmark and subject to periodic revision.

These variants allow issuers and investors to align NCDs with their risk appetite and financial objectives.

Features of NCDs

Non-Convertible Debentures possess certain distinctive features:

• Fixed or floating interest payments at regular intervals
• Defined maturity period, ranging from a few years to over a decade
• Credit rating by recognised rating agencies
• Tradability in secondary markets for listed NCDs
• Priority over equity shareholders in repayment

These features make NCDs a preferred instrument for investors seeking stable income with relatively lower volatility compared to equities.

Role in Corporate Financing

NCDs play a vital role in corporate financing by enabling companies to access long-term funds without diluting equity ownership. They are particularly important for infrastructure companies, non-banking financial companies, and large corporates with substantial capital requirements.
For financial institutions, NCDs help in asset-liability management by matching long-term assets with long-term liabilities, thereby improving balance sheet stability.

Importance in the Indian Financial System

In the Indian financial system, NCDs contribute to the development of the corporate bond market, which is essential for reducing over-dependence on bank credit. A well-functioning NCD market enhances financial diversification and resilience by providing multiple funding channels to businesses.
NCDs also offer banks, mutual funds, insurance companies, and provident funds an avenue to invest surplus funds in interest-bearing instruments, supporting efficient allocation of financial resources.

Relevance to the Indian Economy

At the macroeconomic level, NCDs facilitate capital formation by channelising household and institutional savings into productive investments. By supporting corporate expansion and infrastructure development, they contribute to economic growth, employment generation, and industrial development.
The expansion of the NCD market also strengthens financial markets, improves risk distribution, and enhances the overall depth of the Indian economy’s debt segment.

Advantages of NCDs

The growing popularity of NCDs can be attributed to several advantages:

• Predictable and regular income for investors
• Higher returns compared to traditional bank deposits
• Priority claim over equity shareholders
• Flexibility in tenure and interest structure
• No dilution of ownership for issuing companies