Non Convertible Debentures are long term investment opportunities issued by companies to raise funds. The NCDs have no collateral and hence heavily dependent on the creditworthiness of the company. The credit scores of the company issuing the NCD should be considered before investing in such instruments. Even the NCDs are rated by the rating agencies. NCDs carry a fixed rate of interest and a fixed maturity period. The money is raised through a public issue. Subsequently, they are traded over the counter or on the exchange. Investors in NCDs should do a thorough check on the company that is issuing the debentures with a view to the reason that the funds are being raised. NCDs issued by high rated companies are generally safe and offer certain other benefits like tax exemptions at source and high liquidity as they are tradable on the stock exchange before they reach maturity.
We can help at two levels, first we can assist investors in assessing the credit rating and financial health of the companies issuing NCDs. We will analyse the terms and conditions of the NCD offer, evaluate the risk associated with the interest rate and creditworthiness of the issuer, and guide to suitable NCDs that align with the investor's income requirements and risk tolerance. The second place where we can assist is to execute the transaction.
Market linked debentures or MLDs are non convertible debentures where the returns are not fixed. The returns of MLDs are linked to an underlying market index. The underlying index can be equity index, G-Sec index, Gold etc. The tenure of these schemes can range between 1 to 5 years. Unlike NCDs which pay periodic interest (coupons), the payout in MLDs takes place only on maturity i.e. on maturity you will get the principal and the accrued interest. However, the interest payout will be variable and linked to some market index.
There are two types of MLD:-
Principal Protected: In these MLDs, your principal repayment is assured, irrespective of market movements. If the market movement is unfavourable e.g. market falls, even then you will get your principal on maturity. If you the market movement is favourable, then you will get the principal plus market linked returns on maturity.
Non principal protected: In these MLDs, your principal will be at risk if the market movement is unfavourable. While potential returns are higher in non principal protected MLDs, the risk is considerably higher.
MLDs are rated by the credit rating agencies like CRISIL and ICRA. Credit rating of AAA or AA+ denote high safety (low credit risk).
A Nifty linked debenture MLD may offer investors 75% of Nifty returns over the next 3 years (maturity). So if Nifty gives 40% absolute returns in the next 3 years, then you will get principal + 30% returns on principal. However, if Nifty falls then you will just get the principal (in case of a principal protected MLD).
Some MLDs have conditions attached to pay-off. For example, MLD may pay 10% interest if Nifty does not fall more than 60%. If Nifty falls more than 60%, then only the principal will be paid to the investor (in case of a principal protected MLD).
MLDs can be listed on stock exchanges or unlisted. If you sell a listed MLD after 1 year, then the capital gains will be taxed at 10%. This makes listed MLDs highly tax efficient. For unlisted MLDs, the capital gains on maturity will be taxed as per the income tax rate of the investor is held for less than 36 months. If unlisted MLDs are held for more than 36 months, then the capital gains will be taxed at 20% after allowing for indexation benefits.
