Companies such as Shriram transportation finance, Muthoot finance, manappuram finance and finance Shriram City Union came out with non convertible debentures (NCDs) problems in the recent past. It offers NCDS to other companies as the India Infoline Religare Finvest are also on the cards. What are these NCDs and how they differ from fixed deposits (DF)?
To begin with, as fd, infrastructure bonds and tax-exempt bonds, companies use NCDs as another way to capitalize. For investors like you and me, a Dem is therefore still a different investment option available on the debt side.
Similarities
NCDs are similar to fd, in several ways. For example, as fd, NCDs are issued by companies for a variable period as 400 days, three years, five years.
You can choose to receive the interest at maturity (cumulative option) or choose to receive regular (non-cumulative option) If you need to adjust cash flow, as you do for fd. Although FD Bank and companies are not rated credit, the two Mexico City NBFC and NCDs are classified by agencies like CRISIL, ICRA and care.
And company fd, rating in the NCD can be used to distinguish the riskier less risky offerings.
For example,NCDs both Manappuram finance and finance Shriram City Union opened simultaneously in August 2011, but while the first has received an AA - for attention, found AA, a notch higher by the same agency. Two fd and NCDs, the interest is not tax free. It is required in the slab rates split head "income from other sources".
Differences
There are however some areas of the distinction between these instruments. First, NCDs be guaranteed well or not. A 'safe' means that NCDs, in the case where the company is in liquidation, the holders of NCDs would be considered to be a priority in the reimbursement of money owing to them, since they are guaranteed by a load on one of the company's assets.
In this context, NCDs do not guarantee it will be riskier, but companies compensate for this offering relatively high interest rates on them. The same with NCDs as the lowest rating.
In fd, there is no concept of DF guaranteed or not guaranteed. Bank FD are generally covered by insurance up to Rs 1 lakh of deposits. In this sense, they are safe. This insurance is not available for other fd, are relatively more risky. Even more, if you have a low credit rating.
Secondly, investment in a Fund's five years of scheduled banks are entitled to deduction under Sec 80 c. MNT for a similar regime do not benefit from this advantage. Conversely, if the interest is greater than 10,000 Rs FD, tax is withheld at source (TDS), yes same. There are no TDS for NCDs. Unlike the fd, mostly they emit in the Demat form. As a result, investors may require a Demat account.
The most important difference is that contrary to the fd, NCDs can be listed and traded on the stock exchange, although it is not too high liquidity.
A movement to lower interest rates, for example, could lead to an appreciation of the value of the NCD. The sale of the NCD in the market will attract short term and long term capital gains.