FinTech Glossary

What is a Non-Convertible Debenture?

A Non-Convertible Debenture, or NCD, is a debt instrument issued by a company to raise money from investors for a fixed period at a stated interest rate or yield. The term “non-convertible” means the debenture cannot be converted into equity shares of the issuing company. Investors receive interest and principal repayment according to the terms of the issue, but they do not get ownership in the company.

For businesses, NCDs are a way to raise medium-term or long-term funds without diluting shareholder ownership. For investors, they offer fixed-income exposure to a company's credit risk.

Business and Regulatory Context in India

In India, listed NCDs are regulated through SEBI's framework for issue and listing of non-convertible securities. Companies may issue NCDs through public issues or private placements, depending on their funding strategy, investor base, and regulatory requirements. Listed NCDs usually require disclosures, credit rating information, debenture trustee arrangements, and ongoing compliance.

NCDs may be:

• Secured, backed by specific assets or security cover

• Unsecured, backed only by the issuer's creditworthiness

• Listed, traded on a stock exchange

• Unlisted, privately placed and less liquid

• Fixed-rate or floating-rate

• Cumulative or periodic interest paying

The higher the issuer's credit risk, the higher the yield investors may demand.

How NCDs Work

When a company issues an NCD, investors lend money to the company for a defined maturity period. In return, the company agrees to pay interest and repay the principal on maturity, or as per a scheduled redemption structure.

Key terms to check include:

• Face value

• Coupon rate or yield

• Maturity date

• Interest payment frequency

• Security cover

• Credit rating

• Put or call options

• Listing status and liquidity

• Seniority of repayment

• Default and early redemption provisions

Unlike equity, an NCD does not give voting rights or ownership upside. Its value depends mainly on interest rates, issuer credit quality, maturity, and market liquidity.

Why NCDs Matter for Businesses

NCDs matter because they allow companies to diversify funding beyond bank loans. A company with strong creditworthiness may raise capital through NCDs at competitive rates, match borrowing tenure to project needs, and access institutional or retail investors.

For treasury teams and investors, NCDs must be assessed carefully. A higher coupon may simply reflect higher default risk. Liquidity can also be limited, especially in lower-rated or unlisted instruments. Businesses investing surplus funds in NCDs should review credit ratings, financial statements, covenants, security cover, and concentration exposure before investing.

For issuers, NCDs can be powerful. For investors, they require disciplined credit risk assessment.