1. NCD and how you can make the best use of
this fixed income product
Tue, 04 Mar 2014 21:45:43 -0700
NCDs cannot be converted into shares but they are listed
on stock exchanges and can be bought online after listing
By RASHMI RODDAM, WEALTHRAYS
Most of us Indians are still averse to investing in stocks, the comparatively low trading volume and
fewer number of demat accounts compared to our population bear this out. Out of the existing
demat accounts, many are inactive mainly due to risk aversion.
Yet, the fact is many investors are not aware that they can use their trading accounts to purchase
fixed income products online through stock exchanges and hold them in their demat accounts.
Non-convertible debenture is one such product that fetches higher returns with moderate risk and
liquidity.
Non-convertible debentures or NCDs are issued by companies to raise capital from the market,
where the issuing company agrees to pay a fixed interest on the investment. Going by the name,
non-convertible debentures cannot be converted into shares. NCDs are listed on stock exchanges
and, therefore, can be bought online after their listing. At the time of issue, one can invest in them
by submitting an application form to the issuing company and the debentures get allotted to the
applicant’s demat account.
NCDs are of two types: secured and unsecured. In case of secured debentures, assets are
liquidated to repay the debenture holders if the issuer is not able to fulfil the obligation, which is
not the case in unsecured debentures. Interest (coupon rate) on unsecured debentures will be
slightly higher that that in secured debentures. The tenure of investment in both cases usually
ranges from two to 20 years. However post listing they can be redeemed at any point of time in
the secondary market. The interest rate ranges between 9 per cent and 12 per cent and can be
withdrawn on a monthly, quarterly or annual basis.
One can also opt for a cumulative option where the entire accumulated interest will be paid on
maturity. Unlike a bank fixed deposits, NCDs are held in demat form, which is safe and secure

2. How does an NCD differ from fixed deposits?
NCDs
Interest Rates.... Higher (9 to 12%)
Risk.............. Moderate
Security.......... Secured (charge against assets of company)
Ratings .......... Mandatory
Listing .......... NSE/BSE
Listing risk...... May get listed at a lower price
Taxation ......... Short-term or long-term capital gains tax applicable at the time of redemption
Tax on interest... As per tax slabs
Exit options...... Liquid
Holdings.......... Demat
Bank fixed deposits
Interest Rates.... Lower (7 to 8%)
Risk.............. Low
Security.......... As per DICGC – insurance cover up to Rs 1 lakh
Ratings .......... NA
Listing .......... NA
Listing risk...... NA
Taxation ......... NA
Tax on interest... As per tax slabs
Exit options...... Liquid
Holdings.......... Physical
Corporate deposit schemes
Interest Rates.... Moderate (9.5 to 10%)
Risk.............. High
Security.......... Unsecured - least priority if company defaults
Ratings .......... NA
Listing .......... NA
Listing risk...... NA
Taxation ......... NA
Tax on interest... As per tax slabs
Exit options...... Liquid
Holdings.......... Physical
If held till maturity, the interest earned will be taxed in the hands of investors at marginal incometax rate. If it is sold online through stock exchanges before one year, then short-term capital gains
is applicable on returns and if sold after one year then long-term capital gains tax is levied on
returns. The capital gains tax will be at 10 per cent without indexation of the cost of acquisition
and 20 per cent with indexation, which factors in inflation.
Both public and private sector companies issue debentures to retail investors.
Recently, we have seen secured NCDs issued by Shriram Transport offering yields up to 11.25
per cent and India Infoline Housing Finance offering yields up to 11.5 per cent to retail investors.

3. Did you miss the opportunity to invest in these NCDs? The answer is no. You can buy these
NCDs even now online and avail the same rate of interest and hold them in your demat account.
Risk of low-price listing
At times, an NCD may get listed at a price lower than the issue price. For example: Muthoot
Finance NCDs issued at a face value of Rs 1,000 had gone down to Rs 975 on listing. If you are
required to exit at this point, then you will have to sell at a loss. However, if you redeem at the
time of maturity, then you will be entitled to all the benefits.
Effective re-investment vehicle
NCDs can be used as an effective re-investment instrument in any financial plan and is a good
investment tool for investors of all ages. The option of withdrawing the interest accrued at regular
intervals can be utilised to re-invest in, say, an SIP of a mutual fund or to buy stocks so that only
the interest amount is exposed to riskier high return-generating instruments like equities while the
principal amount remains safe, thus deriving return on return without investing extra amounts from
your pocket.
One can also use this instrument to build a retirement corpus by investing for a long tenure. This
product is also ideal for senior citizens as it can be liquidated at any time in case of emergency
and the interest earned can be availed on a monthly, quarterly and annual basis to use in
contingencies.
However, do consult an expert or do your homework of understanding the business of the issuing
company before investing