How To Select The Right NCD IPO ?

When someone mentions an Initial Public Offering (IPO), most investors instantly think of fast-moving stocks, public listings, and the excitement of a company going public. These events often spark lively discussions, social media debates, and even coffee-table predictions. Equity IPOs are, quite literally, the rockstars of the investment world.

But beyond this noise lies a quieter, lesser-known opportunity—NCD IPOs, or Non-Convertible Debenture IPOs.

They may not grab headlines or dominate news cycles, but for savvy investors, NCD IPOs are like discovering a hidden treasure chest deep within the ocean of financial products. While the world talks about equity, a more subtle vibration is felt in the world of debt-based investments, and only a select few are tuned into this frequency.

If you're among those curious few—looking to explore safer, interest-bearing instruments—then it’s time to pay attention. Before diving into this space, here are four key things you should absolutely know before investing in an NCD IPO.

Whether you‘re a seasoned investor or someone dipping their toes into the vast sea of finance, understanding the dynamics of NCD IPOs is crucial before making any financial commitments.

Understanding NCDs:

Let‘s start by demystifying Non-Convertible Debentures. Debentures are long-term financial instruments that acknowledge a debt obligation of the issuer. In this context, an issuer is a Company that issues the debentures and the debenture holder is the investor aka you! If this is still complicated for you, Imagine these as loans that you provide to companies, but instead of getting just your principal back, you receive regular interest payments. It‘s like being the bank for a company but with the potential of earning higher interest returns than your average savings account.

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.

There are two types of debentures: Secured and Non-Secured.

What are Secured Debentures?

Think of secured NCDs as the crème de la crème section of the investment world. These debentures have a safety net – they‘re backed by the company‘s assets. If, by some unfortunate turn of events, the company can‘t keep up with its financial promises, these assets act like a cushion. They can be liquidated, and the proceeds can be used to pay back the company‘s lenders. It‘s like having collateral for your loan, ensuring a safety cushion for the lenders.

What are Unsecured NCDs?

Now, let‘s dive into the riskier side of the spectrum – unsecured NCDs. These are the daredevils of the investment world, not tethered to the company‘s assets. Without that safety net, they are high-risk and hence offer higher yields as a sort of compensation for the risk they carry. It is like taking part in an adventure sport- the excitement and thrill will be very high in this case higher returns but there is always a level of risk and uncertainty. In case the debentures are unsecured there is no specific collateral to fall back on.

Why Do Companies Issue Non-Convertible Debenture?

Companies use NCDs to get long-term funds from the public. Unlike other debentures that can convert into shares, NCDs don‘t have that feature. To make it more attractive for investors, companies offer a higher interest rate on NCDs. It‘s giving a little extra to make the deal more appealing.

5 Key Points to Consider When Investing in an NCD IPO :-

1. Credit Rating

Credit Rating determines how safe your investment is in this particular debenture. A credit rating is a grade given to a bond by a credit rating agency that helps in understanding whether the issuer of the bond i.e. the company is financially sound or not.

For eg: Imagine you‘re loaning money to a friend. Wouldn‘t you want to know how reliable they are in paying you back? Similarly, check the credit rating of the company issuing the NCDs. Higher ratings generally mean less risk for you. For instance, a credit rating of AAA will be given to a friend who‘s never missed a payment.

The rating agencies evaluate the ability of an entity to fulfill all its obligations to the debenture holder within the predetermined period. The rating agency could be a government, a corporation, or an individual. The primary reason for an assessment done by a credit rating agency is to determine the possibility of a debtor defaulting. It equally represents the credit risk associated with debt instruments whether a loan or a bond.

The evaluation process is done by analyzing the information provided by the debtor through its financial statements, annual reports, and sources such as industry analysis, published articles, and other projections. The Securities and Exchange Board of India regulates all credit rating agencies in India.

So therefore, when you are looking to invest in a NCD issue it is important to make note of the credit rating. Remember that a credit rating assigned to a debenture is not fixed, it may change with the performance and the fundamentals of the company. Any downrating of the debenture of a company is announced by the rating agency.

2: Strong Company foundation

Now, unlike your money parked in a bank, which is insured up to ₹1 lakh, investing in non-convertible debentures (NCDs) doesn‘t come with that safety net. But fear not! As an NCD investor, you get priority if the company hits a rough patch and has to shut shop – you have the first dibs on its assets. However, this golden ticket is only valuable if the company has enough assets to go around. So, before you jump into the investment pool, do some financial detective work. Check if the company is well-funded and flaunts a healthy book value.

Example: Think of it like buying a house. You would want to buy a house that can be sold in the market and gives you value. However, if the house is in a region that has less connectivity to other parts of the city, and has no facilities then for sure you will not be able to easily sell your house. Similarly, understanding and doing thorough research about the company's fundamentals sets the foundation for a strong investment.

3. Investment Liquidity

Unlike a bank FD, an NCD can be sold on the market. You will usually come up with articles saying that NCDs have liquidity as they can be sold in the market. However it is wise to check the amount of liquidity for the particular NCD you opt to purchase. This can be checked by studying the liquidity of the past NCDs issued by the same company. There have been instances where some NCDs have not seen high liquidity.

Example: Let‘s say you buy a limited-edition gadget. It‘s cool, but what if you want to sell it later? You‘d hope there‘s a market for it. Similarly, assess how easily you can buy or sell NCDs in the secondary market. It‘s like having an exit strategy – just in case you want to cash in.

4. Put and Call Option:

Often NCDs come with an option called put and call. The put option gives the investor the right to sell the NCD back to the company after a specified period, while the call option gives the right to the company to retire the NCDs before the maturity date. This is like a safety net for the company as during a falling rate environment, the company can reduce its loss. The put option is beneficial for the inve, store in a rising rate scenario. However, it is important to note that a call option offers a higher rate of returns to investors as the NCD favors issuers.

Example: Think of the put-and-call option as a flexible gym membership. If you decide it‘s not for you, you can put it on hold or cancel it. Similarly, some NCDs come with options that allow you to exit or extend your investment. However, be wary – too many options might not always be a good thing.

4. Post Tax Yield:

The yields that you see advertised by issuers do not tell you the whole story - the tax part of it is left out! A lot like buying a product online and realising there are additional tax charges to be paid at the checkout. Likewise, any income that one earns from NCDs is added to the total income of the year and taxed at the normal rate. So, before you get too excited over the advertised yields, it‘s wise to consider the tax implications and see if the deal is as sweet as it seems on the surface.

Example: When you get a bonus at work, but then you realize a chunk is taken out for taxes. Similarly, when evaluating NCD returns, look beyond the headline interest rate. Consider taxes to get a real sense of what you‘ll take home. It‘s like looking at your net salary rather than the gross amount.

Now, that you know about the five important points to consider before investing in an NCD IPO, let us take a look from where and how you can invest in NCDs.

Where can you buy NCDs?

The issuing company begins the public issue of its NCD for a specified period. NCDs are listed on the stock exchange after that as specified by the company. Think of the issuing company as opening a limited-time opportunity for people to invest in their Non-Convertible Debentures (NCDs).

After this initial phase, the NCDs make their way to the stock exchange, making them available to a wider audience.

You can access a wide range of AA to AAA rated NCD IPOs through brokers such as Bondskart. Through bondskart.com you can easily invest in NCD IPOs by following a quick three-step process.

As we wrap up this article on NCD IPOs, remember that they are like a unique dish rich in flavour but requiring a discerning palate. Stay with us as we unpack the often-confusing world of the debt market to help you navigate it better and equip you to make informed investment decisions, Ready to dive in? Visit JM Financial Services and start your NCD IPO journey today.

 

 

FAQs :-

Q1. What is an NCD IPO?
A Non-Convertible Debenture (NCD) IPO is a public offering where companies raise debt capital from investors. Unlike convertible debentures, NCDs cannot be converted into equity shares and provide fixed interest income.

Q2. Are NCDs safe to invest in?
The safety of NCDs depends on the credit rating of the issuing company. Higher-rated (AAA/AA) NCDs are generally considered safer, though not risk-free.

Q3. What is the difference between secured and unsecured NCDs?
Secured NCDs are backed by the company’s assets, offering protection if the company defaults. Unsecured NCDs have no collateral and thus carry higher risk, but also offer potentially higher returns.

Q4. How are NCDs taxed?
Interest earned from NCDs is added to your annual income and taxed as per your income tax slab. They do not offer tax exemptions like PPF or ELSS.

Q5. Can I exit an NCD before maturity?
Yes, if the NCD is listed on a stock exchange, you can sell it in the secondary market. However, liquidity may vary, and prices can fluctuate.

Q6. What are put and call options in NCDs?
A put option allows the investor to sell the NCD back to the issuer before maturity, while a call option gives the issuer the right to redeem the NCD before maturity.

Q7. Where can I invest in NCD IPOs?
You can invest through brokers or platforms like Bondskart or JM Financial Services, which provide easy access to AA/AAA-rated NCD offerings.

Q8. What is a credit rating in NCDs?
It is an evaluation provided by credit rating agencies that indicates the financial strength and repayment ability of the issuer. Ratings like AAA signify strong creditworthiness.

Q9. What is the minimum investment amount in NCD IPOs?
The minimum investment typically starts from ₹10,000, but this may vary based on the specific issue.

Q10. Are NCDs better than Fixed Deposits?
NCDs often offer higher returns than FDs but come with higher risk. Unlike FDs, NCDs are not insured by the RBI, so understanding the issuer’s credibility is crucial.

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