Non convertible debentures (NCD) might look lucrative due to higher rate of interest but you must read the pitfalls as appended below:
- Pl note that interest earned is not tax free unless specifically mentioned.
- At times these NCDs are in the nature of subordinated debt and hence the claims of the holders thereof will be subordinated to the claims of other secured and other unsecured creditors of our Company.
- At times it is also stated that no charge upon the assets of our Company would be created in connection with the NCDs, in the event of default in connection therewith, the holders of NCDs may not be able to recover their principal amount and/or the interest accrued therein in a timely manner, for the entire value of the NCDs held by them or at all.
- Accordingly, in such a case the holders of NCDs may lose all or a part of their investment therein. Further, the payment of interest and the repayment of the principal amount in connection with the NCDs would be subject to the requirements of RBI, which may also require our Company to obtain a prior approval from the RBI in certain circumstances.
Thus you must read fineprint of these NCDs else you may lose your capital in case of default and one such NCD doing round in the market is of India Infoline Finance Limited NCD which is offering a lucrative 12.75% rate of interest. It does not mean that you may lose capital with the NCD but this is one risk factor which must be considered before going for NCDs.
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