Housing finance company Dewan Housing Finance Corporation (DHFL) delayed payment on Rs 960 crore worth of non-convertible debentures (NCD) on June 4, triggering a rating downgrade, fall in Net Asset Value (NAV) of schemes with exposure and a market tumble.

NCDs have gained prominence in the minds of retail investors since the Infrastructure Leasing & Financial Services (IL&FS) saga and once again gained traction thanks to Essel Group and DHFL. So, here's a quick explainer about what NCDs actually mean.

What Is A Non-Convertible Debenture?

NCDs are essentially debt instruments used by companies to raise long-term capital. Since they are a long-term source of funds, their maturity period can vary anywhere from 90 days to 2 years. It has a fixed tenure, which is pre-decided and the fundraising is done via a public issue.

Investors who chose to invest receive regular interest at a certain rate with payout options including monthly, quarterly, semi-annual or annual. The reason they are called non-convertible is that unlike convertible debentures, NCDs cannot be converted into shares at a later stage.

Types Of NCDs

There are essentially two types of NCDs - secured and unsecured.

Secured NCDs are usually backed by a specific asset/group of assets owned by the issuing company. This means that if the company fails to pay, investors can claim payment via liquidation of assets. Unsecured NCDs are an overall charge against all assets/resources of a company. Since they are not backed by specified assets, they offer less surety than the secured option.

In terms of the hierarchy of repayments, secured debenture holders will be paid first and unsecured debenture holders will be paid from what's left after meeting obligations of secured debtors from the relevant assets.

Do NCDs Offer Any Benefits?

NCDs carry some benefits. They offer higher interest rates, which appeal to investors. But, this very appeal has come into question now given the recent defaults. Another advantage that NCDs theoretically offer is liquidity. This means that NCDs are listed on stock exchanges, though they are nowhere as liquid as shares.

NCDs: Why Ratings matter?

If an investor is considering an NCD investment, they stress on the rating. Every issue is rated by rating agencies to reflect the company's ability to service their debt on time. A lower rating means higher credit risk and vice versa.

But, given that many companies have seen a sharp fall from 'AAA' to 'D' in just a few short months should make retail investors consider the value that an investment like this would mean for their portfolio.

First Published:Jun 7, 2019 6:36 PM IST