Non-Convertible Debenture (NCD)
A Non-Convertible Debenture (NCD) is a fixed or floating-rate corporate debt instrument that cannot be converted into equity shares of the issuer, traded on Indian stock exchanges after listing, and is subject to mandatory credit rating by a SEBI-registered credit rating agency.
NCDs are issued by companies through a public offer (open to retail investors) or a private placement (restricted to qualified institutional buyers and corporates). The Securities and Exchange Board of India (SEBI) regulates public NCD issuances through the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, which replaced the earlier 2008 framework. Issuers must file a prospectus or shelf prospectus with SEBI and must have obtained credit ratings from at least one registered credit rating agency.
Investors in public NCDs include retail individuals, high-net-worth individuals, and non-institutional investors. Minimum subscription amounts vary but public-issue NCDs have historically had face values of Rs 1,000 per debenture, making them accessible. Coupon payments can be monthly, quarterly, semi-annual, or annual. Some NCDs are secured by specific assets of the issuer (pari passu charge over identified assets), while others are unsecured.
Credit ratings are central to NCD investing. Instruments rated AAA (highest safety) or AA+ carry the lowest default risk and trade at the tightest spreads over G-Secs. Lower-rated NCDs (A, BBB, or sub-investment grade) offer higher coupons but with commensurately higher default risk. Several NBFC and HFC issuers suffered rating downgrades following the IL&FS crisis in September 2018, which triggered redemption pressure on their NCDs and illuminated the liquidity risks inherent even in secured instruments when market confidence erodes.
The secondary market for listed NCDs on NSE and BSE has improved but remains less liquid than the G-Sec market. Bid-ask spreads can be wide, and price discovery is sometimes poor for smaller or lower-rated issues. Retail investors who need liquidity before maturity may face significant price impact costs.
NCD interest income is taxable as income from other sources for individual investors. TDS at 10 per cent is applicable if the annual interest received from a single issuer exceeds Rs 5,000 for physical holders and Rs 5,000 for demat holders on listed NCDs, though rules have been revised over time.