Non Convertible Debentures - A simple analysis of if NCDs are safe for retail Investors?
This video is in hindi and covers the following topic:
Non-Convertible Debentures – क्या यह Retail Investors के लिए safe हैं?
NCDs are debt financial instruments that companies use to raise medium- to long-term capital.
Several companies, including IIFL Home Finance, Indiabulls Housing Finance and Edelweiss Financial Services, have announced public issues to raise funds through non-convertible debentures, offering interest rates between 8.25–9.7%
At a time when fixed deposit rates are in low single digits, these NCD offerings look lucrative.
For retail investors, non-convertible debentures (NCDs) were an attractive source of income until two years ago
However, a spate of defaults in the financial sector in the last three years has made this a risky area now. Still, investors can consider investing in NCDs after evaluating the issuer’s profile.
Companies kept away from the market as the pandemic raged in 2020.
In fact, NCD issues were on the decline since 2019 after the collapse of IL&FS and the DHFL crisis.
The major players in the NCD market are housing finance companies, gold loan companies and non-banking financial companies (NBFCs) which found it a good avenue for funds with the decline in interest rates in the system
Apart from retail investors, banks, mutual funds and insurance companies also invest in NCDs.
Although NCDs are generally considered safe fixed-income instruments, some recent defaults have made investors cautious
NCDs can be either secured by the issuer company’s assets, or unsecured
Certain issuers, with credit rating below investment grade, had in the past issued both a secured NCD and another unsecured one through the same offer document, with different credit ratings
The risk is high in the case of unsecured NCDs, even though they offer high interest rates.
Defaults of Reliance Capital Ltd have raised concerns among investors, with Rs 16,260 crore (15,855 crore are secured NCDs and Rs 1,405 crore unsecured) worth of NCDs stuck in the company after the RBI superseded it recently.
DHFL owes NCD holders (including retail investors, mutual funds and others) Rs 41,431 crore
When the IL&FS collapse happened three years ago, Rs 25,000 crore of NCDs was stuck in the company, which is yet to complete the resolution plan
If a bankruptcy happens, banks have recourse to personal guarantees of promoters, but NCD holders have none.
All these defaults show that even secured NCDs are not safe for investors.
Investors should see if a mutual fund has invested in papers issued by that company and if not, then they should consider why MFs have not invested in a high interest yielding paper
They should look at the history of the company and its past issuances and should not just chase returns
Investors must differentiate between papers of different companies and they should go for a lower-interest-yielding NCD issued by a high-quality company rather than a high-interest-yielding paper of a weaker company
Go for high quality AAA-rated papers
Investments into them should not exceed 5% of the overall portfolio
