What Are NCD's? Non-Convertible Debentures! (#53)

What Are NCDs? Non-Convertible Debentures Explained

What Does NCD Stand For, and What Does It Mean?

NCD stands for Non-Convertible Debenture.

Important correction to make upfront: the name itself tells you the key feature — these debentures cannot be converted into other assets like company shares. This is actually the defining characteristic that separates an NCD from its counterpart, a Convertible Debenture (which can be converted into equity shares under agreed terms). An NCD stays a pure debt instrument for its entire term — you lend money, earn interest, and get your principal back in cash at maturity, with no option to convert that into ownership in the company.

→ Related: What Are Bonds? Explained in Simple Words(#29) — NCDs work in a genuinely similar way to bonds.

How Do NCDs Work?

When a company needs funds for business expansion, it can raise that money by issuing NCDs to investors — similar in spirit to how companies raise money through the share market, just structured as debt rather than equity.

An NCD is essentially a formal document confirming the amount you've lent to the company. Interest rates and maturity periods vary by issuance. Depending on the specific NCD, interest is typically paid out either monthly or annually, or in some cases, both the interest and principal are paid together in a lump sum at maturity.

If an NCD matures within 1 year, tax is deducted on the interest earned. Once matured, the principal amount is transferred directly to your registered bank account.

Types of NCDs

There are two main types:

Secured NCDs

Secured NCDs are backed by the company's assets — meaning if the company defaults, those underlying assets can be used to help repay investors. This backing makes secured NCDs meaningfully lower-risk.

Unsecured NCDs

Unsecured NCDs carry no such backing. If the company defaults, there's no specific asset investors have a claim to recover from — meaning genuinely higher risk of not receiving interest payments, or even the original invested amount.

The Trade-Off: Secured vs. Unsecured

Unsecured NCDs tend to offer higher interest rates to compensate for their higher risk. Secured NCDs tend to offer lower interest rates in exchange for meaningfully lower risk.

This mirrors a pattern you'll see elsewhere in investing too — in the share market, larger, more established companies are generally considered safer but offer more modest returns, while smaller companies carry more risk with the potential for higher returns.

→ Related: Bonds vs. Stocks: Are Bonds Safer Than Stocks?(#30) — the same risk/reward trade-off shows up there too.

As with bonds, NCDs — despite being debt instruments rather than shares — are not entirely risk-free. Checking whether an NCD is secured or unsecured, and researching the issuing company's financial health, is worth doing before investing.

That covers the core mechanics of NCDs, and — importantly — what "non-convertible" actually means. Thanks for reading.

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