What is a Non-Convertible Debenture (NCD)?

Non-Convertible Debentures Meaning

Non-convertible debentures, also known as NCDs, refer to debentures that cannot be exchanged for shares or equities. A debenture is a long-term debt instrument used by companies to borrow money. It is specific type of debenture that cannot be converted into equity shares of the issuing company. In other ways, Big companies issue non-convertible debentures to raise money. These are fixed-income instruments with set terms and interest rates that can't be converted into shares. The interest rates on these debentures usually stay the same.

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Why are Non-Convertible Debentures issued?

Companies issue NCDs as a way to raise funds for various purposes, such as expansion, working capital requirements, debt refinancing, or other business needs. Investors who buy these NCDs essentially lend money to the company in exchange for periodic interest payments and the repayment of the principal amount at maturity.

How are Non-Convertible Debentures Works?

The issuance of non- convertible debentures-companies involves several steps:

1- Company Decision

The company’s management decides to raise funds through NCDs and determines the terms, such as the interest rate, maturity period, and the total amount to be raised.

2- Due Diligence

The company might need to get credit ratings from rating agencies to determine the creditworthiness of the debentures.

3- Offer Document

An offer document is prepared detailing all the terms and conditions of the NCD issue. This includes information about the company’s financials, the use of funds, risk factors, and more.

4- Regulatory Approval

Companies usually need to get regulatory approval from entities like the Securities and Exchange Board of India (SEBI) in India before issuing Non Convertible Debentures.

5- Distribution

The NCDs are offered to the public through various channels like public issue, private placement, or a combination of both. Investors can subscribe to the NCDs based on the terms provided in the offer document.

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Impact of Non-Convertible Debentures:

1- Impact on Companies

NCDs provide companies with an alternative way to raise capital without diluting ownership by issuing new equity shares. This can be particularly useful when equity markets are not favorable or when the company wants to maintain control.

2- Impact on Investors

Investors who purchase NCDs receive fixed interest payments at regular intervals and get their principal back upon maturity. The risk-free rate lies in the company’s ability to meet its debt obligations. If the company faces financial difficulties, there could be a risk of default, which might lead to non-payment of interest or principal.

3- Impact on Markets

The issuance of NCDs adds to the overall debt market and diversifies investment opportunities for both institutional and retail investors.

Here’s the Non convertible debentures example:

Company NameKings Infra
Agreement Date13.10.2022
Debenture TypeUnlisted, Secured, Non-convertible Debentures
Issuance AmountUp to Rs.12.5 Crore
Trustee NameVistra ITCL (India) Limited
Agreement TypeDebenture Trust Agreement
Issuance BasisPrivate Placement
Issuance MethodTranches

In the information  provided, “Trustee Name” refers to the entity that has been appointed as the trustee to oversee the debenture issuance and hold the debenture assets in trust for the benefit of the debenture holders.

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