How To Invest In Debentures

Date:

Considerations Before Investing In Non

What Is Debentures? Should You Invest In Debentures OR FD Explained By CA Rachana Ranade

Few important factors that you should consider before investing in an NCD are listed below:

Rating & safety: CRISIL & other agencies provide credit ratings for NCDs. A lower rating signifies higher risk and vice versa. Thus, NCDs with a higher rating are safer. Similarly, Secured NCDs are safer than Unsecured NCDs.

Company Background: The Credit, repayment history as well as other fundamentals of the company raising the NCDs needs to be carefully studied before making any investment decision.

Liquidity: NCDs are liquid since they are listed on the stock exchange. They might have a built-in clause that allows you a premature exit, i.e. a PUT Option. This option can be exercised after the lock-in period, which is usually greater than 90 days.

Taxation and TDS: NCDs other than the tax-free bonds are taxed as per individual tax slabs under the head, Income from Other Sources. All NCDs listed on the stock exchange are not subject to TDS. Investors who exit the NCD before a year are subject to Short-term Capital Gains tax. Investors who exit after a year, but before maturity are subject to Long-term Capital Gains tax.

Rate of Return: Rate of return for NCDs is usually greater than the other debt instruments. The current rate of return is between 10-11%.

Advantage Of Investing In Debentures

Debentures in India have certain attractive qualities as an investment option. The following are some of the pros of a debenture:

  • Fixed Income

This is a preferred investment option since the return is established by a fixed rate of income and the investment is protected by a charge on the firm s assets. For everyone, a fixed return with lower risk is the preferable investment option.

Legal Action

Debentures issued by a holding company do not reflect ownership of the company. As a result, debenture holders have no voting rights or control over the issuing authoritys management. They can, however, take legal action against the organization if the repayment is late.

Returns

Debentures offer a better return than shares since they have a higher face value.In the event that the firm is liquidated, debenture holders are given first priority in repaying the borrowed funds.

Debenture Interest

Regardless of profit or loss, the involved firm is obligated to return the commitments to the debenture holders at a specified Debenture interest rates.

How Can The Value Of Debentures Change

Debentures are traded in the Nepalese securities market, but they are not as commonly traded like stocks. There are two ways in which the value of a debenture can change. One is at the level of the market and another on an individual level.

At the level of the market

E.g., lets say you currently hold a debenture with fixed interest at 9%. And Lets jump into the future and assume that after two years, people can buy debentures at fixed interest rates of 10%. In this case, the value of your debenture decreases as people can easily buy a 10% debenture in the market. And the opposite is true as well i.e., if, after two years, people can only purchase debentures at a fixed rate of say 8%, then the value of your debenture increases. In a future post, I will discuss how these values can be calculated mathematically.

On an individual level

Also Check: Where To Invest In S& p 500

Debentures Vs Bonds: Key Differences

Debentures are often compared to bonds, but in reality, debentures are just a particular type of bond. While bonds are backed by collateral, debentures are not backed at all.

Lets compare the differences between debentures and bonds and find out which is a better investment option for you.

Convertible Debentures: The Cons

Accounting Entries: Redemption of Debentures by Sinking ...
  • There is a risk that despite progress of the business, market conditions for financing may be worse when valuation is negotiated for the next round.
  • If a subsequent financing round is not raised by the maturity date of the debenture, the early round investors will have the ability to exercise their security and manage the business for purpose of liquidating the assets to repay their debenture.
  • The investors may sit in a strong negotiating position with your business as you try to negotiate the conversion price for their debenture and interest into equity to avoid obligation to repay the amounts.
  • Recommended Reading: How Can I Start Investing In Stock Market

    Know The Risks Of Debentures

    Debentures are generally lower-risk investments than stocks but they arent entirely risk-free. There are some specific factors to consider when evaluating whether theyre a good fit.

    For example, you may be subject to interest rate risk with fixed-rate debentures. If interest rates rise after you invest in a debenture, you may miss out on higher yields if youre locked in at a lower rate. Likewise, floating rate debentures could yield lower rates of return if the benchmark rate they track drops.

    is also something to consider, though again, companies or governments that issue debentures typically have stronger credit ratings. But on the off chance that a government defaults or a company goes under, you could lose money on a debenture investment.

    Finally, consider how inflation and shifting prices for consumer goods could affect debentures. If inflation is on the rise and it outpaces the interest generated by debentures, you could find yourself struggling to break even or worse, posting a negative return.

    Difference Between Debentures & Debenture Stock

    Debentures and debenture stocks are frequently regarded in the same way. They are, however, not the same. Debentures are debt instruments or securities that companies and government organizations use to accumulate capital.

    Debenture stocks, on the other hand, are loan contracts between a firm and its holders. Dividends are given to the holders at predetermined intervals from the companys profits.

    The functioning of debenture stock is comparable to the operation of preferred stock. Furthermore, when it comes to the risk aspect of an investment, debenture stocks are no different from any other type of stock.

    The trust deed, on the other hand, backs things up. Stockholders can also appoint receivers to assist them in realizing assets and keeping their money safe.

    Also Check: What Is Robo Advisor Investing

    What Are The Advantages Of Debentures

    For investors, debentures are also extremely useful because the interest rate that they can get is generally higher than the interest rates on their bank deposits. It also generates a consistent cash flow that they can use as one of their reliable income streams.

    For companies, debentures are a very convenient means of raising financial resources for budding companies. It is a great way for them to secure short to mid-term financing to meet their working capital requirements or to fund capital intensive projects.

    They are also advantageous for companies since they carry lower interest rates and longer repayment dates as compared to other types of loans and debt instruments.

    What To Do If Things Go Wrong

    Basics of investing in Bonds and Debentures | English

    If something goes wrong with your investment you may be able to recover some of your money.

    Contact the company with a formal complaint. See how to complain.

    The company planned to use investors’ money to on-lend to property developers. Six months after Mary invested, the finance company went bust. The company directors had overestimated the company’s assets. There was no return to investors. Mary lost a big chunk of her hard earned retirement savings.

    Don’t Miss: Real Estate Investment And Development Company

    Several Companies Have Announced Public Issues To Raise Funds Through Non

    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 8.259.7%. At a time when fixed deposit rates are in low single digits, these NCD offerings look lucrative.

    For retail investors, non-convertible debentures 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 issuers profile.

    NCDs are debt financial instruments that companies use to raise medium- to long-term capital. Fund mobilisation through NCDs had declined in the last two years for several reasons including the impact of Covid-19. Companies raised Rs 10,587 crore through NCDs from retail investors in 2020-21, compared to Rs 14,984 crore in 2019-20, Rs 36,679 in 2018-19, just Rs 5,172 crore in 2017-18, and Rs 29,093 crore in 2016-17, according to Sebi data.

    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.

    What is the risk due to defaults?

    All these defaults show that even secured NCDs are not safe for investors.

    What should retail investors look for?

    How Debentures Secured And Unsecured Notes Work

    Companies set the interest rate on the debentures, secured and unsecured notes in advance. In return, the company promises to:

    • make regular interest payments
    • return the money you lend them at a date in the future

    Companies use debentures because they are a cheap way for them to borrow money. They have lower interest rates and longer repayment dates compared to other types of loans.

    You May Like: Florida Real Estate Investment Companies

    What Are The Different Types Of Debenture

    There are two main types of debentures that can be issued:

    #1 Convertible debentures

    Interest-bearing bonds that can be converted from debt into equity shares after a specific period of time. This is a special feature that corporations take advantage of because it can attract lenders and usually carries a lower interest rate for the issuing company.

    #2 Non-convertible debentures

    Regular debt instruments that are not convertible into equity shares. However, to attract lenders and investors, these come with higher interest rates.

    Ncd Vs Fd/corporate Fd

    Investment value of Convertible debenture

    Few important differences between Fixed Deposits and Non-Convertible Debentures are:

    1). Unlike FDs, NCDs are traded on the exchange and hence more liquid thereby enabling the investors to exit even before the maturity.2). Most NCDs are secured in nature which are backed by the assets of the company, unlike FDs, though Bank FDs are backed by insurance for a maximum of Rs. 1 lakh.3). There is no TDS on the interest income of the NCDs. Whereas, TDS is applicable in case of Bank deposits.

    Also read: All you need to know before you invest in Fixed Deposits

    Read Also: I Want To Invest In Mutual Funds

    What Are Company Debentures

    When it comes to corporate finance, company debentures are loan instruments for medium to a long term of period. These are offered by both large companies and the government. Debentures mainly work on the reputation of the issuing authorities and at a fixed interest rate. Authority bodies issue debentures when they seek to borrow money from the public at a predetermined rate of interest.

    Agra Ventures Announces Agreement To Extend Maturity Date For Convertible Debentures

    VANCOUVER, British Columbia, April 05, 2022 — Agra Ventures Ltd. , a growth-oriented and diversified company focused on the international cannabis industry, announces that it has entered into an agreement with holders of the Companys 10.00% Senior Unsecured Convertible Debentures to amend the Debentures to extend the maturity date for an additional twelve months to March 12, 2023. The Company has additionally satisfied the aggregate accrued interest on the Debentures for the period from January 1, 2021 to December 31, 2021, totaling $2,100,000, by the issuance of 1,200,000 common shares in the capital of the Company on a pro rata basis to the holders of the Debentures.

    AboutAgra Ventures Ltd.

    Agra Ventures is a growth-oriented and diversified company focused on the international cannabis industry. The company is dedicated to the cultivation, distribution and marketing of high-quality cannabis and cannabis-infused products worldwide. Agra Ventures primary asset in Canada is Boundary Bay Cannabis located in Delta, BC, which is one of the largest cannabis greenhouse facilities focused on the cost-optimized cultivation of high-potency cannabis. Abroad, the companys wholly owned subsidiary, Farmako GmbH, is focused on becoming Europes leading distributor of medical cannabis. Farmako currently has active product distribution operations in Germany and is fully licensed in the United Kingdom.

    ONBEHALFOFTHEBOARDOFDIRECTORSNickKuzyk,InvestorRelationsE:T:783-6056

    AgraVenturesLtd.

    Also Check: Solar System Return On Investment

    Characteristics Of Bonds And Debentures

    The bonds exhibit the following characteristics:

    • The bonds have a face value or par value that is paid to the bondholder at the time of maturity. It is usually $1,000 corporate bonds, but it can be greater for government bonds.
    • In most bonds, the coupons are paid every 6 months, but they can also be monthly, quarterly or annually.
    • The maturity period can be as pintsize as 1 day that can go up to 30 years. The thumb rule is that the coupon rate is directly proportional to the maturity period the longer the maturity period higher is the coupon rate.

    The debentures exhibit the following characteristics:

    • Usually, the debentures are part of a series issued over a particular period of time.
    • The holders of debentures are creditors for a company, and thus they dont possess any voting rights.
    • The interest rate paid on debentures is fixed in nature.
    • The debentures are long-term funding sources, and the maturity period usually falls in the range of 10 to 20 years.

    What Are The Disadvantages Of Investing In Debentures

    How to Invest in Bonds & Debentures? – Hindi

    The main point to understand is that not all debentures offer good investments. The higher the rate of return, the more risky the investment and the lower the return, the safer the investment.

    When considering the risks and rewards of investing in a debenture, it is critical to weigh the risks and rewards of the debentures against those of other, probably more provident, investments.

    There are two key risks with debentures.

  • Interest rate risk: When interest rates rise, the value of your debentures will fall as other investors will not be interested in a lower yield debt investment. On the other hand, if interest rates fall, the value of your debentures will rise as they offer a better return than whats available in the market.
  • Issuer risk: One of the key disadvantages to debentures is that they are not backed by any kind of collateral. Instead, they are backed solely by the faith and credit of the issuing party. In case the issuer of the debenture is not able to meet its payment due to a business downturn, it can be catastrophic. This is why higher risk companies issue debentures at a higher interest rate so as to make it worth the risk for investors. A recent high profile equivalent would be the Ever Grande bond default.
  • Recommended Reading: Best Place To Invest In Stocks Online

    How Debentures Work

    Debentures are often issued when a corporation or government needs to raise capital for a specific purpose. For example, a city government may need funds to move ahead with road maintenance or construction projects while a corporation may require capital to complete an expansion project. In these types of scenarios, debentures can act as a form of long-term financing.

    When a debenture is issued, it can offer a floating or fixed-interest coupon rate for investors. In the case of corporate debentures, interest payments may be paid ahead of shareholder dividends. When its time to repay the principal on debenture investments, issuers can choose between lump-sum payments or installments.

    In some instances, companies may allow investors to convert their debenture into shares of stock. Whether this is optional or required depends on the terms of the debenture. Convertible debentures may be attractive to investors who are interested in eventually owning an equity stake in the company.

    Debentures can be an attractive option for raising capital when a corporation or government would prefer not to use existing assets as security for traditional bonds. Companies may also rely on debentures to raise capital if theyve already pledged all available assets as collateral elsewhere. Because they often have longer repayment windows and lower interest rates, debentures may be more attractive than other types of long-term financing.

    What Are Debentures

    When you buy a companys debentures, you lend capital to the company. In return, the company offers you a promissory note. This note is known as a debenture. It promises to repay you the principal amount with a fixed interest rate after a particular tenure.

    Debentures are like bonds. If the company decides to issue bonds, they have to mandatorily back it up with a collateral. Whereas, in case of debentures keeping collateral is optional.

    Recommended Reading: Best Legal Entity For Real Estate Investing

    What Is Debenture

    Debentures are a type of unsecured debt security issued by a company or organization to investors in order to raise money.

    In simple terms, you loan the money to a company and they promise to pay you a pre-determined interest rate for the period and the full balance upon the end of the period. You receive a certificate as evidence of the debt which is called the debenture.

    How To Invest In

    Your company is in the need of finance for investing in a ...

    Public Issue: During the public issue of the bonds, you can invest in them by submitting a physical form furnishing the details as requested. Also, with www.kotaksecurities.com: you can make an investment online & enjoy the ease of investing

    Exchange: Post the public issue these bonds are listed on NSE or BSE or at times on both. You can invest in these bonds through your Kotak Securities trading account the way you invest in shares.

    Have more questions? to find answers.

    Introduction of Unified Payments Interface mechanism and Application through Online interface and Streamlining the process of Public issues of securities namely Debt securities, Non-convertible redeemable preference shares, Securitised Debt Instruments and Municipal Debt Securities: UPI is an instant payment system developed by the NPCI. In case of an offline request i.e. physical request form, an investor may submit the bid-cum-application form and use his / her bank account linked UPI ID for the purpose of blocking of funds, if the application value is Rs.2 lac or less. KSL shall upload the bid on the Stock Exchange bidding platform. The application amount would be blocked through the UPI mechanism in this case. You may refer to the circulars here. In case of any queries, you may get in touch with our designated customer service desk.

    About Us

    For Customer Service, dial 1800 209 9191 Write to us at for Trading Account-related queries and for Demat Account-related queries

    NSDL/CDSL: IN-DP-629-2021

    Also Check: Return On Investment For Bathroom Remodel

    Share post:

    Popular

    More like this
    Related

    Selling Investment Property Capital Gains

    Offset Gains...

    Best Way To Invest In Startups

    What Is...

    Where Do You Invest In Mutual Funds

    Mutual Funds...