← Writing / Debt & Fixed Income
An NCD is essentially you lending money to a company at a fixed interest rate for a fixed period. The company agrees to pay you interest, quarterly, semi-annually, or annually depending on the structure, and returns your principal at the end of the tenor. The “non-convertible” part means this loan stays a loan; it does not turn into shares of the company. You will always get cash, not equity.
How this differs from a convertible debenture
A convertible debenture gives the holder an option, or sometimes an obligation, to convert the debt into equity shares of the company at a predetermined price. Companies use convertible debentures when they want to raise money now with the possibility of converting it to equity later, often as part of startup or growth financing.
A Non-Convertible Debenture has no such feature. It is a clean fixed income instrument, you lend, company pays interest, company returns principal at maturity. No conversion, no equity optionality. This simplicity is why NCDs are more common in retail public issues.
Secured NCDs
Secured NCDs are backed by a specific charge on the company’s assets. This means that if the company cannot repay, these particular assets, identified at the time of issuance, can be sold off to repay NCD holders. The charge is created in favour of a debenture trustee, who is legally obligated to protect investors’ interests.
In practice, recovery from a default is still a long and messy process even with security. But the legal backing does improve your position relative to unsecured creditors in insolvency proceedings.
Unsecured NCDs
Unsecured NCDs are a plain promise to pay, backed by nothing except the general creditworthiness of the company. If the company defaults, you stand in line behind banks, secured creditors, and secured debenture holders. What is left after all of them get paid is what unsecured NCD holders might recover.
The yield on unsecured NCDs is typically higher than secured NCDs from the same issuer. This yield difference is the market’s way of pricing the additional risk. When you see an NCD offering notably high returns compared to similar companies, check whether it is secured or unsecured, that is often the explanation.
Why NCD yields are higher than FDs
Bank FDs are backed by a regulated institution with DICGC insurance up to ₹5 lakh. The RBI monitors banks constantly. There are capital adequacy requirements, liquidity coverage ratios, and intervention mechanisms. The credit risk on a reputable bank FD is close to zero for amounts within insurance limits.
An NCD issuer is just a company. It may be a large, well-run NBFC with decades of history, or it may be a real estate company raising money for a project. In either case, there is no RBI backstop, no DICGC insurance, and no central bank oversight of the same intensity as banks.
The extra 1–2% yield on an NCD compensates you for taking this additional credit risk. It is not free money. It is payment for risk.
Credit ratings, useful but not guarantees
SEBI mandates that publicly issued NCDs carry a credit rating from agencies like CRISIL, ICRA, CARE, or India Ratings. A AAA rating means the agency considers the probability of default extremely low. AA means very low. A means low. And so on down the scale.
Ratings are useful starting points, not verdicts. Rating agencies work from publicly available information and company disclosures. They can miss things. IL&FS carried top ratings before it collapsed. DHFL carried investment-grade ratings until it was obvious the company was in serious trouble. Use ratings as one input, not the only one.
If you are investing in NCDs, read at least the summary of the company’s financials, revenue, debt, debt-to-equity ratio, interest coverage ratio, and the specific purpose for which this NCD money is being raised. If any of this sounds alarming, the yield is not worth it.
How to apply for NCDs in a public issue
When a company issues NCDs to the public, the issue is open for a limited period, typically 10–30 days. You apply through your broker platform. On your broker, ICICI Direct, HDFC Securities, or Groww, you will see NCD public issue applications in the same section as IPO or bond applications.
The application process is ASBA-based (Application Supported by Blocked Amount). Your money is blocked in your bank account until allotment, after which the allotted amount is debited and NCDs are credited to your Demat account. The balance is unblocked.
After allotment, the NCDs get listed on BSE or NSE, usually within a week. You can then hold them until maturity or sell them on the exchange.
Buying NCDs on the secondary market
You can also buy already-listed NCDs from the BSE/NSE secondary market through your Demat account, exactly like buying a share. Search for the NCD by its name or ISIN. The price shown will be the traded price, which may be above or below face value depending on current interest rates and the company’s credit situation.
A key concept: if interest rates have risen since the NCD was issued, its market price will be below face value (higher yield for the new buyer). If rates have fallen, it will trade above face value. This is bond math, price and yield move inversely. Buying at a discount to face value means your effective yield to maturity is higher than the coupon rate printed on the NCD.
Tax treatment
Interest from NCDs is taxed as income at your slab rate, same as FD interest. Capital gain on selling before maturity is either short-term (under 12 months, taxed at slab rate) or long-term (over 12 months, taxed at 20% with indexation for listed NCDs). TDS at 10% is deducted on interest for listed NCDs.
There is no special tax treatment for NCDs that makes them more efficient than FDs for most retail investors. For a detailed comparison of when NCDs make sense over FDs, read my NCD vs FD comparison.
Practical checklist before investing in an NCD
Is the NCD secured or unsecured? What assets back the secured charge? What is the credit rating, and has it been downgraded recently? What is the company’s debt-to-equity ratio? What will the money raised be used for? What is the lock-in and what are your exit options? Is the yield premium over a comparable bank FD or G-Sec worth the credit risk you are taking?
If you cannot answer most of these from the prospectus or your own research, that is useful information in itself. An instrument you do not understand well enough to evaluate is probably not the right instrument for your portfolio.
NCDs are a legitimate fixed income tool for investors who do their credit homework, treat them as lending to a business, not as a high-yield FD substitute, and always prefer secured over unsecured when the yield difference does not justify the added subordination.
This post is for educational purposes only. It is not financial advice. Mohit Mehra is not a SEBI registered investment advisor. Please consult a qualified financial advisor before making investment decisions.