1. What is a debenture?
2. How many types of debentures are there?
There are two types of debentures: convertible and non-convertible.
3. What are convertible debentures?
Convertible debentures are unsecured bonds that can be converted into equity of the issuing company equity.
4. What are non-convertible debentures?
Non-convertible debentures (NCDs) are unsecured bonds that cannot be converted into equity of the issuing company.
5. What are secured NCDs?
Secured NCDs are backed by assets, meaning if the issuer is unable
to fulfill its obligation, its assets are liquidated to repay investors
holding the debentures. Secured debentures offer lower interest rates
compared with unsecured ones.
6. What are non-secured NCDs?
Non-secure NCDs are not backed by assets.
7. Tell me more about NCDs.
- NCDs are traded on stock exchanges
- Issuance and trading are in demat form only
- Interest is paid through direct credit / electronic clearing system / real-time gross settlement / national electronic funds transfer mode
- A good credit rating is required for a company to issue an NCD
8. Who should invest in NCDs?
- Investors who desire stable consistent returns with the least risk
- Investors who seek consistent monthly returns
- Investors looking to diversify their portfolio by investing in fixed-income securities
- Investors who park their savings in fixed deposits (FDs)
9. Why should I choose NCDs over FDs?
Compared with FDs, NCDs offer higher returns and carry moderate
risk. Plus, NCDs are liquid as these are traded on exchanges and have a
limited lock-in period, unlike FDs.
10. What is a coupon rate?
A coupon rate is the annual interest rate paid by a fixed-income
security. It is expressed as a percentage of the face value of the
security.
11. What is a redeemable debenture?
A redeemable debenture is the one for which the firm issuing the
debenture agrees to repay the borrowed sum on a specified date or after a
specified period of notice.
12. How are capital gains from NCDs taxed?
- When held till maturity, the interest earned on NCDs is added to the total income and taxed as per the income tax slab
- The gain from selling NCDs in less than one year is taxed as a short-term capital gain
- The gain from NCDs sold after one year but before maturity is taxed as a long-term capital gain
- Capital gains are taxed at the rate of 10% without indexation of the cost of acquisition and at 20% with indexation, which factors in inflation
13. How to invest in NCDs?
At the time of a public issue, you may invest in NCDs by submitting a physical form providing requisite details. You may also invest in them online by visiting Sharekhan or any other online demat account websites.