BAJAJ BROKING
July 15, 2025
7 mins read
Investing in Non-Convertible Debentures (NCDs) in India involves understanding their structure and the markets in which they are traded. NCDs are debt instruments issued by companies to raise capital for various purposes, often for long-term financing needs. They typically offer a fixed rate of interest over a specified period and return the principal amount at maturity. This guide outlines the fundamental aspects of NCDs and the processes for their acquisition in the Indian financial landscape. It includes details about their characteristics, the benefits they may offer, and the procedural steps for investing through both initial public offerings and stock exchange trading.
Non-Convertible Debentures (NCDs) are financial instruments that can offer a way to earn fixed income. For investors in India, understanding how to approach NCD investments, both in the primary and secondary markets, is a part of making informed financial choices. This article provides information on NCDs, their types, and the steps involved in their purchase.
Corporations issue debt instruments known as non-convertible debentures (NCDs) to raise money from the general public. They are termed "non-convertible" because, unlike convertible debentures, they cannot be converted into equity shares of the issuing company at a later date. NCDs typically have a fixed maturity period and offer a predetermined rate of interest to investors. The interest can be paid out periodically (e.g., monthly, quarterly, semi-annually, annually) or cumulatively, where the interest accrues and is paid along with the principal at maturity. Companies issue NCDs to finance their operations, expansion projects, or to manage their existing debt. NCDs represent a loan taken by the company from investors, promising to repay the principal amount along with interest.
NCDs come in different forms, each with distinct features:
These debentures are backed by specific assets of the issuing company. In the event of a default by the issuer, investors holding secured NCDs have a claim on the pledged assets to recover their investment. This backing provides a layer of security to investors. The assets backing these NCDs are often disclosed in the offer document.
These debentures are not backed by any specific collateral. Their repayment depends solely on the financial stability and creditworthiness of the issuing company. In a liquidation scenario, unsecured NCD holders are typically paid after secured creditors. Due to the absence of collateral, unsecured NCDs generally offer a relatively higher interest rate compared to secured NCDs to compensate for the increased risk.
These NCDs give the issuer the right, but not the obligation, to buy back the debentures from investors before their scheduled maturity date. Companies might exercise this call option if interest rates in the market fall, allowing them to refinance their debt at a lower cost. If an NCD is callable, it means the investor may not hold it until the original maturity if the issuer decides to call it back.
These NCDs grant the investor the right, but not the obligation, to sell the debentures back to the issuer before the scheduled maturity date. Investors might exercise this put option if interest rates rise significantly, allowing them to reinvest their funds at a higher rate, or if they need liquidity. This feature provides flexibility to the investor.
NCDs provide a fixed rate of interest over their tenure. This offers a predictable income stream, and may appeal to those preferring predictable income.
Some NCDs may offer higher interest rates compared to traditional fixed-income instruments, subject to issuer and market conditions, particularly from well-rated companies.
Including NCDs in a portfolio can contribute to diversification. As debt instruments, their performance may not always correlate directly with equity markets, potentially helping to balance overall portfolio risk.
Many NCDs are listed on stock exchanges (BSE and NSE). This listing provides investors with an option to sell their holdings in the secondary market before maturity, offering liquidity.
NCDs are assigned credit ratings by agencies like CRISIL, ICRA, CARE, and India Ratings. These ratings provide an assessment of the issuer's ability to meet its financial obligations, assisting investors in evaluating credit risk. Investors can use these ratings to choose NCDs that align with their risk appetite.
Buying NCDs in the primary market typically involves an Initial Public Offering (IPO) of the debentures. Here are the steps:
Before an NCD IPO opens, thoroughly review the offer document (prospectus) issued by the company. This document contains details about the issuer's financial health, credit rating, interest rate offered, tenure, frequency of interest payments, and whether the NCDs are secured or unsecured, callable or puttable.
Pay attention to the credit rating provided by rating agencies. A higher rating indicates a lower credit risk.
To apply for NCDs in the primary market, you need an Open Demat account and a trading account with a registered stockbroker. The Demat account holds your NCDs in electronic form.
During the subscription period of the NCD IPO, you can submit your application through your stockbroker's online platform or through the ASBA (Application Supported by Blocked Amount) facility via your bank. You will need to specify the number of NCDs you wish to purchase and the applicable rate. The minimum investment for NCDs is typically ₹10,000.
After the subscription period closes, NCDs are allotted to applicants. Allotment is often on a "first-come, first-served" basis within different investor categories. Once allotted, the NCDs are credited to your Demat account. They are then listed on recognised stock exchanges like BSE and NSE, allowing for secondary market trading.
Once NCDs are listed on stock exchanges, they can be bought and sold in the secondary market, similar to equity shares.
A Demat account is essential to hold NCDs in electronic form, and a trading account is necessary to place buy and sell orders on the stock exchange.
Use your trading platform to search for NCDs currently trading on the BSE or NSE. You can filter by issuer, credit rating, maturity date, and current yield. Research the issuer's financial performance and the NCD's current market price and yield to maturity.
Once you have identified the NCD you wish to buy, place a buy order through your stockbroker's trading platform. You will need to specify the NCD code, the quantity, and the price at which you are willing to buy (limit order) or execute at the current market price (market order).
If your order matches a seller's order, the transaction will be executed. The NCDs will be credited to your Demat account, and the funds will be debited from your trading account after the settlement process (typically T+1 business day).
After purchasing NCDs in the secondary market, it is advisable to monitor their market price, the issuer's financial health, and prevailing interest rates, as these factors can influence the value of your holding if you decide to sell before maturity.
This is a primary factor. A higher credit rating from agencies indicates a lower probability of default by the issuer. Consider NCDs from companies with a credit rating of AA or higher.
Beyond the credit rating, assess the financial stability of the issuing company. Review their financial statements, debt-to-equity ratio, and cash flow to understand their ability to service debt.
Compare the interest rates offered by different NCDs and choose a payout frequency (e.g., monthly, annual, or cumulative) that aligns with your income needs.
Consider the maturity period of the NCD and whether it aligns with your investment horizon. While listed NCDs offer liquidity, secondary market trading volume can vary.
Understand whether the NCD is secured by specific assets. Secured NCDs generally carry less risk due to collateral backing.
Be aware if the NCD has callable or puttable features, as these can impact your ability to hold the debenture until maturity or sell it early.
The interest earned from NCDs is generally considered taxable income. This interest is added to your total income and taxed according to your applicable income tax slab. If NCDs are held in dematerialised form and are listed on a recognised stock exchange, Tax Deducted at Source (TDS) might not be applicable on interest payments if certain conditions are met, such as the interest amount being below a specified threshold. However, if NCDs are held in physical form or are unlisted, TDS may apply. Capital gains tax also applies when NCDs are sold before maturity. If sold within 12 months, any profit is considered a short-term capital gain and is added to your income, taxed at your slab rate. If sold after 12 months but before maturity, any profit is considered a long-term capital gain, typically taxed at 10% without indexation or 20% with indexation, whichever is more beneficial to the investor. Investors may refer to a tax advisor for clarification on tax applicability.
Non-Convertible Debentures can serve as an investment option for individuals seeking fixed income and portfolio diversification. Understanding the different types of NCDs, evaluating the issuer's creditworthiness, and following the correct procedures for buying them in both primary and secondary markets are important steps. Considering the tax implications is also a part of NCD investment planning.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.
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The minimum investment required for NCDs is typically ₹10,000, although this amount can vary depending on the specific NCD issue.
For listed NCDs traded on stock exchanges (BSE and NSE), a Demat account is necessary to hold them in electronic form. Unlisted NCDs, typically issued through private placements, may not require a Demat account and can be held in physical form, though some issuers might offer a Demat option for convenience.
NCDs are a type of bond issued by companies, specifically characterised by being non-convertible into equity shares. While all NCDs are debt instruments, the term 'bond' is broader and can include government bonds, corporate bonds (which can be convertible or non-convertible), and municipal bonds. A key distinction is that NCDs always remain debt, whereas some bonds can be converted into equity.
Risks associated with NCDs include credit risk (the issuer defaulting on payments), liquidity risk (difficulty selling in the secondary market before maturity if trading volume is low), and interest rate risk (changes in market interest rates affecting the NCD's market value).
Interest received from NCDs is typically taxed in accordance with your appropriate income tax slab after being applied to your overall income. Capital gains tax also applies if NCDs are sold before maturity, categorised as short-term or long-term capital gains based on the holding period.
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