What are Non-Convertible Debentures (NCDs)?

Non-Convertible Debentures (NCDs) are fixed-income instruments issued by companies to raise capital from investors. Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company at a later date. Instead, they offer a fixed rate of interest (coupon rate) for a predefined period and repay the principal amount at maturity.

They are an attractive investment option for those seeking stable, predictable returns, especially when issued by companies with strong credit ratings.

Key Features of NCDs:

Fixed Interest Payouts: Monthly, quarterly, annually, or at maturity

Tenure: Typically ranges from 1 year to 10 years

Credit Rating: Issued by agencies like CRISIL, CARE, ICRA, indicating risk level

Listing: Can be listed on stock exchanges for liquidity or remain unlisted

Types of Non-Convertible Debentures

1. Secured NCDs

These are NCDs that are backed by specific assets of the issuing company. In case the issuer defaults on interest or principal repayment, investors have a legal claim on the underlying assets

Characteristics:

• Lower risk compared to unsecured NCDs
• Generally have slightly lower coupon rates due to asset backing
• More attractive to conservative or retail investors

Example:
An infrastructure company issues a secured NCD backed by toll revenue from a highway project

2. Unsecured NCDs

Unsecured NCDs do not have any collateral backing. Investors rely solely on the company’s creditworthiness and ability to repay.

Characteristics:

• Higher risk compared to secured NCDs
• Often offer higher interest rates to compensate for the risk
• Suitable for investors with higher risk tolerance and understanding of issuer fundamentals

Example:
A tech company with strong cash flows issues an unsecured NCD offering a higher yield but without asset backing

I. Understanding the NCD Investor Landscape

a. Types of Investors in NCD

Non-Convertible Debentures (NCDs) attract a diverse group of investors, each with distinct motivations, risk appetites, and investment strategies. Understanding who these investors are is crucial for tailoring your messaging and acquisition strategy. Below are the primary types of investors in NCDs:

1. Retail Investors

These are individual investors, often from middle-income or upper-middle-income backgrounds, seeking stable and predictable returns.

Characteristics:

• Typically invest in small ticket sizes (₹10,000–₹5 lakhs)
• Prefer secured NCDs with shorter tenures and fixed coupon payouts
• Often compare NCDs with traditional instruments like FDs or government bonds
  What They Look For:
• Higher interest rates than FDs
• Safety of capital (credit ratings matter)
• Easy online/offline access to invest

2. HNIs (High Net Worth Individuals)

HNIs are individuals with significant investable wealth, looking to diversify their portfolio across debt and equity.
Characteristics:

• Invest larger sums (₹10 lakhs to ₹5 crores+)
• May participate in both public issues and private placements
• Prefer customized structures (e.g., bullet repayment, flexible tenure)
  What They Look For:
• Yield optimization
• Portfolio diversification with fixed income
• Strong issuer credentials and risk-mitigated structures

3. Corporate Treasuries

These include CFOs or finance heads managing surplus liquidity for large companies or SMEs

Characteristics:

• Invest for treasury management purposes
• Require liquidity, short tenure, and low-risk instruments
• Analyze NCDs for balance sheet impact and regulatory compliance
  
  What They Look For:
• Strong issuer profile and credit rating
• High liquidity or tradable listed NCDs
• Quarterly/semi-annual coupon payments for cash flow alignment

4. Family Offices

Family offices manage wealth for ultra-high-net-worth families, typically through customized portfolios

Characteristics:

• Look for uncorrelated asset classes and tax-efficient structures
• Favor private placements with higher customization
• Often evaluate impact, ESG factors, and succession aspects
  What They Look For:
• Yield plus long-term capital preservation
• Trust in promoter/issuer and post-issue reporting
• Exclusive access or differentiated terms

5. Mutual Funds or Institutions (for listed NCDs)

Institutional investors including debt mutual funds, insurance companies, pension funds, and banks participate primarily in listed NCDs

Characteristics:

• Have stringent compliance and investment-grade mandates
• Large ticket sizes and secondary market activity
• Perform detailed credit and liquidity analysis
  What They Look For:
• High-grade ratings (AAA/AA+)
• Listed instruments with sufficient trading volume
• Regulatory suitability and transparency in structure

b. What Motivates NCD Investors

Investors are drawn to Non-Convertible Debentures (NCDs) for a variety of reasons. While each investor segment may prioritize different factors, the motivations generally revolve around safety, returns, and predictability. Let’s break down the key motivators:

1. Fixed and Predictable Income

Why it matters:

NCDs offer fixed interest payments (coupon rates) on a regular schedule—monthly, quarterly, semi-annually, or annually—making them attractive to income-seeking investors.

Who it appeals to:

• Retirees or conservative investors who depend on steady cash flow
• Family offices and HNIs allocating funds for consistent passive income
• Corporate treasuries aligning returns with cash flow needs

Example: A retiree investing ₹10 lakhs in an NCD with 10% annual interest gets ₹1 lakh/year in predictable income

2. Higher Returns Than Fixed Deposits (FDs)

Why it matters:

Compared to traditional bank FDs, NCDs typically offer 1.5–3% higher interest rates, especially from NBFCs and mid-tier issuers.

Who it appeals to:

• Retail investors seeking better yield without jumping into equity markets
• HNIs optimizing returns across their debt portfolios
• Tax-conscious investors who want post-tax returns to beat inflation

Example: While an FD might offer 6.5% p.a., a similarly rated NCD might offer 9%–15% p.a.

3. Tenure and Liquidity Preferences

Why it matters:

NCDs come in flexible tenures—ranging from 1 to 10 years—and may be listed, providing liquidity through the secondary market.

Who it appeals to:

• Investors looking to lock in yields for medium to long term
• Corporates or HNIs who want maturity aligned with liabilities
• Shorter tenure NCDs appeal to investors wary of interest rate cycles

Example: A corporate treasury may invest in a 2-year listed NCD with quarterly interest payouts for working capital parking.