{"id":1839,"date":"2021-02-02T09:21:57","date_gmt":"2021-02-02T09:21:57","guid":{"rendered":"https:\/\/swaritadvisors.com\/blog\/?p=1839"},"modified":"2021-02-03T05:53:46","modified_gmt":"2021-02-03T05:53:46","slug":"pros-and-cons-of-non-convertible-debentures-issued-by-nbfc","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/","title":{"rendered":"What are the Pros and Cons of Non Convertible Debentures (NCD) Issued by NBFC?"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Non- Convertible Debentures (NCD) are the fixed income instruments, which\nare issued or obtained by the high rated companies in the form of the public\nissue to reserve long term capital appreciation. NCD relatively offer high rate\nof interest as compared to convertible debentures. Non- convertible debentures\nare the popular method of raising funds for the NBFCs. The NCDs permits the\ninvestors to reserve their funds for a long time at a higher interest rate.\nAlso, the guidelines of the Reserve Bank of India have, to a great extent\ntightened the NCDs and raising other forms of money of <strong><a href=\"https:\/\/swaritadvisors.com\/nbfc-registration\" class=\"text-primary\">NBFCs<\/a><\/strong>.\nThis article will provide with you with the information regarding what are the\npros and cons of Non- Convertible Debentures (NCD) issued by NBFC.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a3aa3dbbbd8e\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a3aa3dbbbd8e\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#What_are_Non_Convertible_Debentures_NCD\" title=\"What are Non Convertible Debentures (NCD)?\">What are Non Convertible Debentures (NCD)?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#Conditions_to_Issue_NCDs_in_NBFCs\" title=\"Conditions to\nIssue NCDs in NBFCs\">Conditions to\nIssue NCDs in NBFCs<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#What_are_the_types_of_Non-_Convertible_Debentures\" title=\"What are the\ntypes of Non- Convertible Debentures? \">What are the\ntypes of Non- Convertible Debentures? <\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#Secured_Non_Convertible_Debentures\" title=\"Secured Non Convertible Debentures\">Secured Non Convertible Debentures<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#Unsecured_NCDs\" title=\"Unsecured NCDs\">Unsecured NCDs<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#Pros_and_Cons_of_Non-_Convertible_Debentures\" title=\"Pros and Cons\nof Non- Convertible Debentures\">Pros and Cons\nof Non- Convertible Debentures<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#Pros_Non_Convertible_Debentures\" title=\"Pros Non Convertible Debentures\">Pros Non Convertible Debentures<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#Cons_Non_Convertible_Debentures\" title=\"Cons Non Convertible Debentures\">Cons Non Convertible Debentures<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#Eligibility_to_Issue_NCDs\" title=\"Eligibility to\nIssue NCDs\">Eligibility to\nIssue NCDs<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_Non_Convertible_Debentures_NCD\"><\/span>What are Non Convertible Debentures (NCD)?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>According to the guidelines of the Reserve Bank of India (RBI), Non- Convertible Debentures are secured negotiable money market instruments or debt instrument which are matured in less than one year issued by the NBFCs and corporates to meet with their short- term funding requirements, issued by way of private placement with the investors. The guidelines also cover Non Convertible Debentures which are matured over more than one year with optionality attached to it which can be exercised within a year from the date of the issue.<\/p>\n\n\n\n<p>NCDs are the financial instruments used by the NBFCs and companies to raise long-term capital and this action is performed by them through public issue of shares. Basically, Non- Convertible Debentures are debt instrument. The NCDs have a fixed tenure and the people receive a regular certain rate of interest on the investment made by them. <\/p>\n\n\n\n<p>Some debentures can be converted into shares at one point of time\nand this is done at the discretion of the owner. However, it is not possible in\nthe case of non- convertible debentures. And that is why, they are known as\nnon- convertible debentures or NCDs. <\/p>\n\n\n\n<p>The Non- Banking Financial Companies (NBFCs) raises money by way of debt security or by issuance of capital, including debentures through private placement or <strong><a href=\"https:\/\/swaritadvisors.com\/public-issues\" class=\"text-primary\">public issue<\/a><\/strong>. Therefore, there has been witnessed an increase in the borrowings of the NBFCs through the issue of debentures majorly being on private placement basis. And hence, NBFCs depend on NCDs. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conditions_to_Issue_NCDs_in_NBFCs\"><\/span>Conditions to\nIssue NCDs in NBFCs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The following are the conditions which are required to issue NCDs in\nNBFCs:<\/p>\n\n\n\n<ul><li>It is necessary to disclose the financial position of the company to the prospective investors as per the standard market practice. <\/li><li>The company further is required to provide a certified copy of the investors to the investors by assuring that it has complied with all the eligibility criteria laid down by the RBI. <\/li><li>It is mandatory for the company to comply with all the provisions of the <strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Companies_Act_2013\" class=\"text-primary\">Companies Act, 2013<\/a><\/strong> and the regulations framed by the Reserve Bank of India (RBI).<\/li><li>The company shall be issued with the debenture certificate within the prescribed period specified in the Companies Act, 2013. <\/li><li>The Non- Convertible Debentures issued at the face value carrying a coupon rate or a discount rate to face value as a zer0 coupon instruments is determined by the corporate. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_types_of_Non-_Convertible_Debentures\"><\/span>What are the\ntypes of Non- Convertible Debentures? <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are two types of Non- Convertible Debentures, which are as follows:<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/02\/Untitled-1-Swarit.png\" alt=\"types of Non Convertible Debentures\" class=\"wp-image-1843\" width=\"420\" height=\"209\" srcset=\"https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/02\/Untitled-1-Swarit.png 700w, https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/02\/Untitled-1-Swarit-300x150.png 300w\" sizes=\"(max-width: 420px) 100vw, 420px\" \/><\/figure><\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Secured_Non_Convertible_Debentures\"><\/span>Secured Non Convertible Debentures<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The secured NCDs are comparatively safer of the two kinds of NCDs as\nthe issues of such type are backed by the assets of the company. If at any\ntimecompany fails to pay, then the investors can recover their dues by\nliquidating the assets of the company. However, the interest offered on secured\nNCDs is low. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Unsecured_NCDs\"><\/span>Unsecured NCDs<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The unsecured NCDs are riskier than the secured NCDs as it is not backed by the assets of the company. Therefore, when at any time company fails to pay, the investors are left with no choice but to wait until they receive the payments as no assets of the company can be used to recover their dues. However, the rate of interest offered by the unsecured NCDs is higher as compared to the secured NCDs.<\/p>\n\n\n\n<p><strong>Also, Read:<\/strong> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/blog\/know-the-factors-which-led-to-the-growth-of-indian-nbfcs\/\">Know the Factors which led to the growth of Indian NBFCs<\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Pros_and_Cons_of_Non-_Convertible_Debentures\"><\/span>Pros and Cons\nof Non- Convertible Debentures<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The pros and cons of non- convertible debentures are as follows:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Pros_Non_Convertible_Debentures\"><\/span>Pros Non Convertible Debentures<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ul><li>Every NBFC or company that\nseeks to raise money through Non- Convertible Debentures (NCD) is rated by the\nagencies such as CRISIL, Fitch Ratings, CARE and ICRA. Therefore, the information\nprovided is absolutely verified and there are zero chances of fraud. <\/li><li>The fact that the NCDs issued\nby the NBFC are regulated closely by the Reserve bank of India (RBI), it\nbenefits the investors. The rate of interests keeps on fluctuating on the other\ninvestments and therefore, in these circumstances the NCDs offer a good\ninstrument to keep the returns for a longer period of time.&nbsp; <\/li><li>Non- Convertible Debentures\nissued by the NBFCs normally pay the rate of interest of 150- 175 basis points\nhigher than what is paid by the banks on their FDs. And since, most of the\nNBFCs issuing NCDs are well capitalized and reputed, investors do not see much\nrisk in investing in them. <\/li><li>The debentures have a first or\nsecond charge n the assets of the issuer. Therefore, they are much safer as\ncompared to the other unsecured forms of investment. <\/li><li>If the rates start falling by\n25- 50 basis points from the current level, the investor tends to enjoy the\ncapital appreciation on these NCDs. And hence, this is an advantage. <\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Cons_Non_Convertible_Debentures\"><\/span>Cons Non Convertible Debentures<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ul><li>There are no guaranteed returns\nbeyond the bonds of the government and bank fixed deposits, even bank fixed\ndeposits have risk but it is very low. Therefore, the moment the investors see\npromises of returns larger than the returns which are offered by the government\nbonds, they should understand that it will result in facing risk. This is the\ncardinal or basic rule of investing. <\/li><li>NCDs are not efficient in the\nsituation of tax. For example, even though 9%- 10% coupon rate is paid by NCD,\nthe actual returns are less than 7% on the post- tax basis. <\/li><li>Another major risk is\ninflation. Most of the returns mentioned by NCDs are in nominal terms which\nprovide the right idea regarding the soundness of return. The real return will\nalways be less than the nominal return. Real return means the nominal return\nminus the inflation. Therefore, if inflation goes up, the real return will go\ndown. <\/li><li>The are various class of assets\nin NBFCs. It is divided into two levels that is high quality NBFC and low\nquality NBFC. The investors must use their discretion and invest accordingly in\nthe NCDs issued by the NBFC only after checking the credit rate of these NCDs.\nThe credit rating is the expert opinion on the issuer\u2019s repayment capacity, and\nit is advisable to stock the high rated NBFCs only. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Eligibility_to_Issue_NCDs\"><\/span>Eligibility to\nIssue NCDs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Any NBFCs or corporates are eligible to issue NCDs on fulfilling the\nfollowing criteria:<\/p>\n\n\n\n<ul><li>The NBFC or corporate is having\na tangible net worth which is not less than Rs 4 crore in accordance with the\nlatest audited balance sheet. <\/li><li>The company is endorsed with a\nterm loan or working capital limit by banks or all India financial institution.\n<\/li><li>The classification of the\ncompany\u2019s account of the borrower is done as Standard Asset by the financial\nbanks or institutions. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p> There are many pros and cons of the Non- convertible debentures issued by NBFC. Non- Convertible Debentures are suited to the investors who are willing to invest their funds at a high rate of return and who have the ability to take higher risk. Therefore, for many institutional investorsthey prefer NCDs but, for the individuals there may be other profitable investment opportunities available in the market andit depends upon the investor to make the right choice while investing.<\/p>\n\n\n\n<p><strong>Also, Read:<\/strong> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/blog\/how-can-nbfc-participate-in-insurance-business\/\">NBFC in Insurance Business: How can NBFC Participate in Insurance Business?\n<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Non- Convertible Debentures (NCD) are the fixed income instruments, which are issued or obtained by the high rated companies in the form of the public issue to reserve long term capital appreciation. NCD relatively offer high rate of interest as compared to convertible debentures. Non- convertible debentures are the popular method of raising funds for [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":1840,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[58],"tags":[318],"acf":[],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/1839"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/comments?post=1839"}],"version-history":[{"count":7,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/1839\/revisions"}],"predecessor-version":[{"id":1917,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/1839\/revisions\/1917"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media\/1840"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media?parent=1839"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/categories?post=1839"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/tags?post=1839"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}