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Tuesday, June 21, 2011

NCD- An Another Alternative to FDs

What are NCDs?
NCD (Non Convertible Debentures) is the debt instrument issued by corporate or NBFCs with maturity period necessarily greater than 90 days.
Issuance is done as private placement and issuer needs to obtain credit rating for the NCD from one of the recognized rating agencies.
NCDs can’t be converted into the shares of the issuing company in future course of time.
Companies choose NCD option when capital market is not performing well and banks concentrating on priority sector lending.
How NCDs are different from FDs?
Both NCD and FDs are debt instruments but they differ significantly in many aspects-
·         Liquidity: Generally NCDs are listed on stock exchanges and thus can be sold any time, while bank FDs are redeemed either as per pre-instruction given by the customer to the bank or investor going  for pre-mature withdrawal

·         Safety: NCDs fall under secure debt category and much safer than corporate FDs. In case of liquidation,NCDs occupy top preference like preference shares while corporate FDs qualify for least priority.
      Bank FDs in India are protected to the extent of ì  1 lakh by DICGC (Deposit Insurance and Credit Guarantee Corporation) for both principal and interest due on the date of liquidation.

·         Types of income: FDs give only interest income, while NCDs give capital gain as well as interest income

·         TDS: NCDs(only dematerialized and listed on the stock exchanges) are not liable for tax deduction while FDs are liable to TDS deduction

·         Taxation: Income from FDs is accounted as IFOS (income from other sources) and added to investors annual income and taxed according to the applicable tax slab.
      When NCDs are sold before I year, the gain is termed as short term gain, and is added to investors annual income and taxed according to the applicable tax slab; and when NCDs are sold after 1 year, long term capital gain tax is applicable, which is 10% of the gain (education cess etc extra).
      (No cost indexation benefits are given in case of bonds and debentures.)

·         Application Period: FDs can be booked on any working day while NCDs from the original issuer can be bought during the issue period only and thereafter can be bought from the open market as NCDs are listed on the exchanges

·         Demat Account: NCDs are issued in Demat form only, and thus Demat account is required for NCDs, while in case of FDs no Demat account is required.

·         Investment Amount: FDs can be booked for any amount while NCDs have restriction of minimum investment amount.

So ultimately which option investor should go for?
Though NCDs pay higher interest rates than FDs but as they are issued by corporate and NBFCs returns depends on their financial performance therefore profile of the issuing company should be checked before investing.

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