Question: Consider the following statements regarding debentures:
1) Those debentures which cannot be converted into shares or equities are called non-convertible debentures (or NCDs)
2) Non-convertible debentures are used as tools to raise long-term funds by companies through a public issue
3) Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer
4) Debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner
Which of the following is/are correct?
(a) Only(1)
(b) Only(2)
(c) (1),(2) and (3)
(d) All the above
Answer: (d)
Related facts:
- Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer.
- Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner.
- The debentures which can’t be converted into shares or equities are called non-convertible debentures (or NCDs).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.
- Besides, NCDs offer various other benefits to the owner such as high liquidity through stock market listing, tax exemptions at source and safety since they can be issued by companies which have a good credit rating as specified in the norms laid down by RBI for the issue of NCDs.
- In India, usually these have to be issued of a minimum maturity of 90 days.
Secured and unsecured Non-convertible debentures (NCDs):
- An NCD can either be secured or unsecured. A secured NCD is backed by the issuing company’s assets.
- This means that the company has to fulfill its debt obligation whatsoever. However, that’s not the case for unsecured NCDs.
- This makes secured NCDs safer since they have a lower default risk.
By Achyutanand Pandey
Links:
https://economictimes.indiatimes.com/definition/non-convertible-debentures
https://www.edelweiss.in/investology/introduction-to-primary-market-79a025/what-is-ncd-non-convertible-debentures-867611