The NCD glossary

A non-convertible debenture is a debt instrument issued by a company to borrow from investors. It pays a stated rate of interest over a fixed tenor and repays the face value at maturity, and unlike a convertible debenture it can never turn into equity.

Buying an NCD makes you a lender, not an owner. You have no voting rights and no share in profits, but you rank ahead of shareholders if the company runs into trouble.

A debenture is a company’s formal acknowledgement of borrowing, governed by the Companies Act and, when publicly issued, by SEBI’s NCS Regulations.

Debentures may be secured or unsecured, convertible or non-convertible, and listed or unlisted. Every public issue must appoint a debenture trustee to act for the holders.

A convertible debenture carries a right or obligation to convert into equity shares on pre-agreed terms. Fully convertible debentures convert entirely; partly convertible ones convert in part and the balance stays as debt.

Convertibles typically pay a lower coupon than an NCD, because the holder is compensated with equity upside instead.

A public issue of NCDs offers debentures to all investors through a prospectus filed with SEBI and the exchanges. It runs on machinery very similar to an IPO: a subscription window, ASBA payment, a registrar, allotment and listing.

Public issues must be rated, and are usually secured. Retail participation is normally strong because the coupons on offer beat comparable bank deposits.

In a private placement, debentures are offered to a limited, identified group of investors — typically institutions — rather than the public at large. It is faster and lighter on disclosure than a public issue.

Privately placed NCDs may still be listed, in which case the issuer must comply with the listing and disclosure obligations that follow.

A secured NCD is backed by a specific or floating charge over the issuer’s assets, created in favour of the debenture trustee for the benefit of all holders.

If the issuer defaults, the trustee can enforce that security. Secured NCDs therefore carry lower coupons than unsecured ones of the same issuer and tenor — the gap is the price of the collateral.

An unsecured NCD has no collateral behind it. Holders are ordinary creditors who rank behind secured lenders if the company is wound up.

Issuers compensate with a higher coupon. In a public issue that offers both, always check which series is secured before comparing rates.

Subordinated debt is repaid only after senior creditors have been paid in full. NBFCs and banks issue it as Tier II capital because regulators allow it to count towards their capital adequacy.

It is riskier than senior unsecured debt of the same issuer, carries a longer tenor, and pays a higher coupon to match.

A shelf prospectus lets a frequent issuer file one comprehensive document covering a borrowing programme, then launch each issue through a much shorter tranche prospectus carrying only the terms of that tranche.

It saves time and cost for NBFCs that tap the retail debt market several times a year. The shelf document is valid for a limited period, within which the tranches must be issued.

NCD issues are announced as a base issue size with a green shoe option to retain oversubscription — for example 200 crore rupees with an option to retain up to 800 crore, for a total of 1,000 crore.

The full amount including the green shoe is what determines when the issue closes early. Reading only the base size will mislead you about how quickly the books can fill.

A public NCD issue is almost always split into series — different combinations of tenor, interest frequency and coupon, offered side by side. Series I might be 24 months paying annually, Series V 60 months paying monthly, and Series VII a cumulative option paying everything at maturity.

You choose the series on the application form and may apply across several in one application. Each has a different effective yield, so compare on yield rather than on headline coupon.

Tenor is how long the money is lent for, quoted in months or years. Retail NCD issues commonly run from two to ten years.

Longer tenors usually carry higher coupons, but they also lock in your rate for longer and expose the market price to bigger swings if interest rates move.

The coupon is the annual interest rate applied to the face value of the debenture. A 9.50 percent coupon on a 1,000-rupee NCD pays 95 rupees a year.

The coupon alone does not tell you the return. A monthly-paying and an annually-paying series at the same coupon deliver different effective yields, because interest received earlier can be reinvested.

Frequency determines when cash reaches you: monthly and quarterly options suit investors who want income, annual options suit those who do not need it in between.

For the same coupon, more frequent payment produces a higher effective annualised yield, because each payment can be put to work sooner.

A cumulative series pays nothing during its life and returns a single enlarged sum at maturity — a 1,000-rupee NCD might redeem at 1,610 after five years.

It suits investors who want compounding rather than income. Be aware that interest is generally taxable as it accrues each year, even though no cash has been received.

Redemption is the repayment of face value on the maturity date, credited to the bank account registered against the demat account holding the NCD.

Eligibility is fixed by the record date shortly before maturity, so a sale in the secondary market close to that date needs care. Debentures are extinguished from the demat account once redeemed.

A put option lets the holder exit early by requiring the issuer to redeem on a specified date. It is valuable when rates have risen and the coupon has become uncompetitive.

Exercise windows are narrow and must be acted on by the stated date. A series carrying a put usually pays slightly less than an equivalent one without.

A call option lets the issuer redeem before maturity. It is exercised when the company can refinance more cheaply, which is precisely when the holder would rather keep the coupon.

That asymmetry is reinvestment risk in concrete form, and callable series compensate for it with a slightly higher coupon.

A step-up coupon rises at defined points in the life of the debenture, or on a trigger such as a rating downgrade; a step-down coupon falls.

Rating-linked step-ups compensate holders if credit quality deteriorates. The trigger conditions are set out in the offer document and the debenture trust deed.

The face value of a retail NCD in India is almost always 1,000 rupees. Interest is computed on it and it is the amount repaid at maturity.

Secondary market prices are quoted against this face value, so an NCD trading at 1,045 is above par and one at 968 is below.

The coupon rate is what the offer document advertises. The effective yield is what you actually earn once the timing of payments is taken into account.

A monthly series at 9.00 percent yields more than 9.00 percent annualised, because each month’s interest can be reinvested. Offer documents publish both figures side by side — compare series on the second one.

Effective yield converts a coupon and its payment schedule into a single comparable annual figure. It is the number to use when choosing between series within an issue, or between two issuers.

It assumes payments are reinvested at the same rate, which rarely holds in practice — so treat it as a comparison tool rather than a guarantee.

Yield to maturity is the return implied by the price you actually pay in the secondary market, combining the remaining coupons with any gain or loss against face value at redemption.

An NCD bought below par has a YTM above its coupon; one bought above par has a YTM below it. For a listed NCD, YTM matters far more than the coupon printed on it.

Between coupon dates, interest builds up day by day. When an NCD changes hands, the buyer pays the seller the accrued interest for the elapsed period on top of the quoted price.

This is why the amount debited on a secondary-market purchase exceeds the clean price shown on screen.

The clean price is what appears on the exchange screen, excluding accrued interest. The dirty price is the clean price plus accrued interest — the amount actually paid on settlement.

Comparing two debentures on clean price alone is misleading if they sit at different points in their coupon cycles.

Debenture prices move inversely to interest rates. If rates rise after you buy, newly issued debt pays more and your fixed coupon looks less attractive, so the market price of your holding falls.

The effect grows with tenor: a ten-year NCD is far more price-sensitive than a two-year one. Holding to maturity avoids the loss, since you still receive face value.

Reinvestment risk is the flip side of interest rate risk. When rates fall, each coupon you receive can only be put back to work at a lower rate, and effective yield calculations that assumed otherwise overstate your return.

It bites hardest on monthly-paying series and on callable debentures, which tend to be called precisely when rates have dropped.

A credit rating is a rating agency’s assessment of the likelihood that a debenture will be serviced on time. Every public NCD issue must be rated, and the rating appears on the cover of the prospectus.

It is an opinion, not a guarantee, and it is reviewed through the life of the instrument. Ratings can and do change — always check the latest one rather than the one printed at issue.

Indian long-term ratings run AAA (highest safety), AA, A, BBB, BB, B, C and D (default), with plus and minus modifiers within categories. BBB minus and above is investment grade; below that is speculative.

Each step down means a higher coupon and a materially higher chance of trouble. A jump of two or three notches between two issues explains most of the difference in the rates they offer.

Credit rating agencies registered with SEBI assign and monitor ratings. CRISIL, ICRA, CARE Ratings, India Ratings and Acuité are the names most often seen on Indian NCD issues.

Agencies are paid by the issuer, which is a structural conflict SEBI manages through disclosure and surveillance obligations. Where two agencies rate the same issue differently, the lower rating is the more prudent assumption.

An outlook — positive, stable or negative — indicates the likely direction of a rating over the medium term. Rating watch signals a near-term event, such as an acquisition or a regulatory action, that may cause a change either way.

A negative outlook on an otherwise comfortable rating is an early warning worth taking seriously before committing to a long tenor.

Security cover expresses how much asset value stands behind each rupee of secured debt — a cover of 1.10 times means the charged assets are worth 110 percent of the outstanding amount.

The issuer must maintain the cover throughout the tenor, and the debenture trustee certifies compliance to the exchanges every quarter.

A charge is the legal interest created over identified assets — typically receivables for an NBFC — in favour of the debenture trustee, who holds it for all holders.

A first charge ranks ahead of other lenders; a pari passu charge shares equally with them. The offer document states which applies, and it determines where you stand in a recovery.

The debenture redemption reserve is an appropriation of profits earmarked for repayment, required from certain classes of issuer under the Companies Act rules. A separate debenture redemption fund requires the issuer to park a prescribed portion of the amount maturing in the coming year in specified liquid investments.

The requirements differ by issuer type, and listed NBFCs are exempt from DRR on public issues while remaining subject to the fund requirement.

Credit risk is the fundamental risk in any debenture: the borrower may simply not pay. It is what the coupon is compensating you for, which is why a 12 percent NCD is not a better version of a 9 percent one.

Ratings, security cover and the issuer’s own financials are the tools for assessing it. Concentrating a portfolio in high-coupon, low-rated paper is the most common mistake in retail debt investing.

A default occurs when a scheduled payment is missed. The rating drops to D, the debenture trustee is required to act on behalf of holders, and enforcement of security or insolvency proceedings may follow.

Recovery for secured holders depends on the quality and enforceability of the charged assets, and takes years rather than months. Unsecured holders usually recover very little.

NCD public issues are paid for through ASBA: the application amount is blocked in your own bank account and debited only to the extent of the debentures allotted.

Applications can be submitted through a Self Certified Syndicate Bank, through a broker on the exchange platform, or through the UPI route within the prescribed limit.

Retail applicants may use the UPI mandate route for NCD applications up to the prescribed ceiling, currently five lakh rupees per application.

The mandate must be approved in the UPI app before the day’s cut-off, exactly as in an IPO. Larger applications must be routed through a bank under conventional ASBA.

The minimum application in a retail NCD issue is usually ten debentures — ten thousand rupees at a face value of 1,000.

Where an application spans several series, the minimum generally applies to the application as a whole rather than to each series, with the split across series left to the applicant.

Above the minimum, applications must be in the stated multiple — usually one debenture, or 1,000 rupees.

So a valid application might be for 10, 11 or 250 debentures, but the prospectus bid details table is the authority for the issue in front of you.

The application form asks which series you want, and you may split one application across several.

If no series is selected, the application is treated as being for the default series named in the prospectus — which may not be the one you intended. Always tick explicitly.

The NCD application form captures the applicant’s name and PAN, the demat account, the investor category, the series-wise number of debentures, and the bank or UPI details against which funds are blocked.

Category selection matters more than in an IPO, because allotment in an NCD issue is run bucket by bucket on a first-come-first-served basis.

Public issue NCDs are allotted only in electronic form. There is no physical certificate option, so a demat account with NSDL or CDSL is a prerequisite.

The PAN on the application must match the PAN on the demat account, or the allotment will fail on reconciliation.

NCD public issues divide the offer into four categories: Category I institutional investors, Category II non-institutional and corporate investors, Category III high net-worth individuals applying above ten lakh rupees, and Category IV retail individual investors applying up to ten lakh.

Each has a fixed percentage reservation. Retail and HNI categories sometimes receive an additional incentive coupon, which is stated in the prospectus.

NCD allotment runs on a first-come-first-served basis by the date of upload, not by lottery. Applications received on an earlier day rank ahead of later ones.

If a category is oversubscribed on the very first day, all applications from that day are allotted proportionately. This is why applying on day one matters far more in an NCD issue than in an IPO.

The basis of allotment sets out how the issue was distributed: category by category, series by series, and day by day where date priority applied.

It also records where a category was scaled back proportionately, which shows exactly how heavily contested each bucket was.

An NCD issue is oversubscribed when demand exceeds the base size plus the green shoe. Within the affected category, applications from the cut-off day are scaled back proportionately.

Strong retail demand in a well-rated issue can fill the books within hours of opening.

An issuer may close an NCD issue early once subscription reaches the base size plus green shoe, subject to giving the notice required by the prospectus and advertising the revised date.

Popular issues sometimes close on day one. Waiting until the announced closing date is a common way to miss an issue entirely.

Where an application is rejected or only partly allotted, the blocked amount is released rather than refunded, since ASBA never debited it in the first place.

Unblocking usually completes within a couple of working days of allotment being finalised.

Public issue NCDs are listed on the debt segment of the BSE, the NSE or both, typically within a week of the issue closing.

Once listed they can be bought and sold through an ordinary trading account, settled in demat, and priced against face value. Listing is also what makes the more favourable capital gains treatment available.

Every series in an NCD issue gets its own ISIN — the twelve-character code that identifies the security in the depository and on the exchange.

Because each series has a distinct ISIN, they trade independently and can quote at quite different prices even though they came from the same issue.

Listed retail NCDs trade in a market lot of one debenture, so a single unit of face value 1,000 rupees can be bought or sold.

The small lot makes them accessible, but it does not make them liquid — most retail NCD series see very thin volumes.

The record date fixes entitlement: whoever holds the debenture in demat at the end of that day receives the coupon or the redemption proceeds, regardless of what happens afterwards.

Selling just before a record date means the buyer collects the coupon, which is why the market price adjusts around it.

The interest payment date is when the coupon is credited, based on holdings as of the record date. The schedule for every series is printed in the prospectus.

Payment goes to the bank account linked to the demat account, so keeping those bank details current is what ensures the money arrives.

A listed NCD’s market price reflects prevailing interest rates, the issuer’s credit standing, remaining tenor and accrued interest. It can trade above or below the 1,000-rupee face value.

Because volumes are thin, quoted prices can be stale and spreads wide. Selling a meaningful quantity often means accepting a discount to the last traded price.

Retail NCDs are listed, but most trade rarely. Liquidity risk is the gap between being able to sell in principle and being able to sell today at a sensible price.

Plan on holding to maturity, or to a put date. Treating a ten-year NCD as an instrument you can exit on demand is the mistake the listing tends to encourage.

Interest on NCDs is taxed as income from other sources at your slab rate. There is no special concessional rate and no deduction comparable to Section 80TTB for bank deposits.

For an investor in the highest slab, a 9.5 percent coupon is closer to 6.5 percent after tax — which is the comparison that should be made against post-tax alternatives.

The exemption that spared listed NCDs held in demat form from TDS was withdrawn with effect from 1 April 2023. Interest on listed debentures is now subject to deduction under Section 193, generally at 10 percent for residents, above the prescribed annual threshold.

TDS is not the final tax. The interest must still be reported in your return and taxed at your slab, with credit taken for the tax already deducted.

Selling a listed NCD on the exchange produces a capital gain or loss. Held for more than twelve months it is long term, taxed at the concessional rate for listed securities without indexation; held for less, it is short term and taxed at slab rates.

Two exceptions matter: redemption at maturity is treated as interest rather than capital gains, and unlisted debentures and market-linked debentures are deemed short term under Section 50AA regardless of holding period.

A cumulative series pays nothing until maturity, but interest is generally taxable on an accrual basis each year for taxpayers following the mercantile method — creating a tax liability without matching cash.

Taxpayers on a cash basis may offer the whole amount in the year of receipt, which can push it into a higher slab. Either way the timing needs planning before choosing a cumulative option.

Every public issue must appoint a debenture trustee — a SEBI-registered entity that holds the charge on the issuer’s assets for the benefit of all holders and monitors compliance with the trust deed.

The trustee certifies security cover to the exchanges each quarter, and on a default it is the party that convenes holders and enforces the security. Individual holders do not act on their own.

The lead manager is the SEBI-registered merchant banker responsible for structuring the series, drafting the prospectus, obtaining the rating and the trustee consent, and running distribution through brokers and banks.

Its due diligence certificate accompanies the offer document filed with SEBI and the exchanges.

The registrar validates applications, runs the date-priority allotment, publishes the basis of allotment, instructs banks to unblock funds and instructs depositories to credit debentures.

It continues afterwards as the record-keeper for interest payments and redemption, and is the first port of call if a coupon does not arrive.

NSDL and CDSL hold NCDs in dematerialised form and maintain the beneficial ownership record used to determine entitlement on each record date.

Allotment, transfer on sale and extinguishment on redemption all happen through depository instructions rather than physical documents.

The SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 consolidated the earlier debt and non-convertible redeemable preference share regulations into a single framework.

They set the eligibility conditions, disclosure requirements, rating and trustee obligations, allotment timelines and listing conditions for every public issue of NCDs in India.