In 2014, RBI announced that NRIs and other foreign nationals are eligible to invest in non-convertible bonds and debentures (NCD Bonds). The contribution of NRIs to the purchasing and selling of shares or debentures has increased.
What are NCDs?
NCD stands for “non-convertible debentures.” These are debt instruments that are issued by companies and are not convertible into equity shares. In other words, holders of NCDs do not have the option to convert the debt they hold into company stock. Instead, they receive fixed periodic interest payments and are paid back the principal amount of the debenture when it matures. NCDs can be issued with different maturities, ranging from a few months to several years. They can be traded on stock exchanges, and the price at which they trade may vary based on the creditworthiness of the issuer and market interest rates. Some investors may choose to invest in NCDs as a way to diversify their portfolio and potentially earn higher returns than they would from more traditional fixed-income investments such as government bonds.
What are Bonds?
A bond is a financial instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). The borrower agrees to pay back the loan according to the terms of the bond, which include the interest rate and the maturity date.
Bonds are often used by companies, municipalities, and governments to finance their operations and capital expenditures. They are considered to be relatively low-risk investments, as the borrower is typically required to make regular interest payments to the investor and to return the principal when the bond matures. As a result, bonds are often used as a way to preserve capital and generate income, although the interest rates they offer are generally lower than those of other investments such as stocks.
There are many different types of bonds, including corporate bonds, municipal bonds, and government bonds. Each type of bond has its own characteristics and risks, and investors should carefully consider these before investing in bonds.
Key features of Bonds:-
- There are a variety of bonds available to NRIs. It is possible for them to invest in capital bonds, units of the public sector, including, corporate bonds, NCD bonds, tax-free NRI bonds, Treasury bills, municipal bonds, and other types of bonds.
- The bond market can assist investors in diversifying their portfolios beyond stocks.
- In accordance with ITA,1 961 there is taxation on interest income from bond investments. On the other hand, some NRI-specific tax-free government bonds provide tax exemptions.
- In accordance with ITA,1 961 there is taxation on interest income from bond investments. On the other hand, some NRI-specific tax-free government bonds provide tax exemptions.
- Most bonds are rated according to their investment grade.
- Bond characteristics include their maturity, coupon (interest) rate, tax status, and callability.
- Bonds are subject to a variety of risks, including interest rate risk, credit/default risk, and prepayment risk.
- Through a Demat account, NRIs are able to purchase and sell bonds.
- Long-term and short-term capital gains are both taxed.
Key features of NCDs:-
- The length of an NCD investment can range from three months to thirty years.
- NCDs only consider the issuer’s credit and credit ratings and do not demand collateral or assets from the issuer.
- It is possible for NRIs, through stock exchange and trade listing, in order to invest in NCDs.
- Before three years, NRIs are barred from withdrawing from NCDs.
- It is now possible for NRIs NCD to invest in NCDs through medium of NCD IPO.
- The interest rate on NCDs is determined by the type of stock and is set at a minimum of 3% for NRIs by RBI regulations.
- On their returns and interests, NCDs must pay a TDS.
- NRIs must provide the RBI with a receipt for their NCD remittances within 30 days of investing.
- They offer interest rates higher than those of bank fixed deposits.
- NCDs issued to NRIs are reflected in the Demat account.
Differences of the both:-
- Bonds are issued by private companies, financial institutions, and governments. Debentures, on the other hand, are issued by private entities to meet specific business needs.
- Bonds have an interest rate, also known as a coupon, that is paid at regular intervals until maturity. Debentures, like bonds, have an interest rate, also known as a coupon, that must be paid at regular intervals until the maturity of the NCD.
- One of the options for secured investments is bonds. They are less risky than other options. Debentures, unlike bonds, are high-risk instruments because they are not backed by any security.
- Bondholders receive interest either monthly or annually. They, too, are unaffected by market volatility. The holder of a debenture receives periodic interest. They are volatile in response to market demands.
- Equity or other financial instruments cannot be created from bonds. However, according to the issuer’s offering, in NCD holder the debt instrument can be converted into a predetermined number of shares after a specified time period.
- NCDs make it convenient for NRIs to invest without requirement of any mortgage or other forms of collateral. On the other hand, bonds is not possible without the deposit of an investor.
Why are Bonds and NCD Bonds so popular?
Five foreign companies have gained an estimated Rs.8.82 billion by investing in NCDs in India. The investment conditions for NRIs in real estate have been liberalized. Bonds, as debt securities, help to generate capital while also cutting banking channels, preventing NRIs from dealing with banks. The fact that five foreign companies have gained an estimated Rs.8.82 billion by investing in NCDs in India demonstrates the popularity of such investments. This has been done to improve the balance sheets of business corporations by improving their investment portfolios.
There is low risk and guaranteed returns on the Indian debt market. Bonds, as debt securities, help generate capital and cut banking channels, removing the hassle of dealing with banks for NRIs. Bond values rise as a result of alluring deals like “coupon rates” or “interest rates.”
In conclusion, Companies and governments issue bonds and debentures to raise capital from the market. These instruments serve a specific purpose and are used to meet the capital requirements of projects, operations, and other endeavors. After gathering relevant information about the preferred option from the two – Bonds or Debentures – one can choose to invest.
