Non-convertible debentures are held in d-mat form and hence offer many advantages over the traditional fixed deposits.
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Unlike western countries, in India investment in non-convertible debentures or bonds by retail investor is very low. There are very few high networth individuals or retail investors who participate in bond market and they earn a handsome return on their investments. One of the main reason for low participation is lack of knowledge and awareness.
Mr O.P. Bhatt (Past Chairman of SBI) coined the concept of issuing NCD’s of SBI in the year 2008-09 to retail investor. The rates offered on the bonds were in the range of 9.25-9.95%, and the lot size was Rs.10000 per bond. The interest rates on Bonds were attractive in comparison to rates offered on fixed deposit. There was an overwhelming response to all the issuances of SBI. The bonds are listed on BSE/NSE retail debt terminal and there is a good volume on all the issuances. After the SBI issue the central government came out with many tax free bonds of central PSU’s. And the response was very good among retail and institutional investor. During last one year the investor in tax free bonds have earned a return of 25-30% on their investments.
The advantage of investing in NCD’s v/s Bank/Corporate Deposits are as follows:
1. Bonds are in demat form:- Thus no hassle of maintaining and safe keeping of physical certificates.
2. Bonds are tradable:- All the bonds issued under public offer are listed on BSE/NSE, thus there is no lock in period. The investor can exit before the maturity.
3. No TDS Deduction:- As the bonds are in demat form and listed, there is no TDS deduction. Thus no hassle of filing form 15G/H.
4. Price discovery :- As the bonds are listed and traded regularly on the exchange. It gives an opportunity to trade and earn profit. The prices of bonds increase, when the interest rate in the economy starts softening.
5. Secured:- The NCD’s are generally secured in nature, unlike bank deposits, which are insured to an extent of Rs.1,00,000/- only.
6. Can be pledged:- The Bonds can be pledged with the Banks/NBFC for securing term loan or overdraft facility.
7. Different tenure of Maturity :- The tenure of bonds can range from less than one year to 30 years. Thus it works as a buffer against reinvestment risk and at the same time offers steady source of interest income.
8. Interest income is earned till the date of transaction:- The price quoted on the exchange consist of three elements. The face value of the bond, accrued interest and the premium. Thus an investor who is selling the bonds before the maturity of the bond gets accrued interest till the date of the sale.
9. Cumulative as well as regular interest payment option:- The NCD’s offer an option of regular interest payment or cumulative option.
10. Taxation:- The investment in NCD’s beyond one year will be considered as long term. And the profit earned on sale will be taxed at 10.30%.
11. Off- Market Transaction:- The transaction is confirmed off-market, but settled on NSE/BSE platform. (NSCCL/ICCL) . Thus there is no settlement risk.