Non-convertible debentures are used as tools to raise long-term funds by companies through a public issue. To compensate for this drawback of non-convertibility, lenders are usually given a higher rate of return compared to convertible debentures. In India, usually these have to be issued of a minimum maturity of 90 days.
There are many reasons why people opt for NCDs:
1. NCDs yield better returns : NCDs offer advanced returns when compared with other investment options.NCDs are fairly attractive due to high returns and low risk. A high income investor can get about 8 percent returns after tax. Nevertheless, this interest rate and rate of return may vary according to market conditions and companies may lower rates according to the prevailing situation.
2. NCDs are not subjected to TDS : Returns from several venture instruments such as bank fixed deposits and company fixed deposits are subject to tax deduction at source (TDS). But in case of an NCD, as per section 193 of the Income Tax Act, no such taxes on interest earned are applicable when securities are issued by a company in a dematerialized (Demat) form and listed on a stock exchange. However, taxes are applicable to NCDs if they are in physical form. Also, a Non Resident Indian (NRI) who invests in NCDs is subject to TDS according to section 195 of the IT act.
3. NCDs are safer than other instruments : Not only do NCDs receive good credit rating, but they are also completely protected by the possessions of the company. As far as additional investments such as company FDs and bank FDs are concerned, they are not protected and are subject to certain risks. Nevertheless, NCDs are also not completely insulated from market risks, but this risk is much lower in comparison.
4. NCDs can be easily liquidated : In case of NCDs you have an option to either sell on the National Stock Exchange or exercise a put option with regards to a premature exit. Exercising a put option enables the investor to exit the bond in return of the face value on the stipulated date. They have better liquidity due to their NSE listing. There are a few disadvantages of premature exits such as interest rate risk on exits from the secondary markets. There may be a possibility that the value of an NCD may fall due to rising interest rates to such an extent that it may even plunge below the face value. On the other hand, if you want to avoid risk, it is advisable to hold an NCD till its maturity.