A Non-Convertible Debenture (NCD) is a fixed-income instrument issued by a company to raise capital from investors. Unlike convertible debentures, NCDs cannot be converted into equity — they stay debt for their entire life. In exchange for lending to the issuer, investors receive a fixed coupon paid periodically (monthly, quarterly, or annually), and the full principal is returned on maturity.
For Indian investors accustomed to the predictability of bank fixed deposits but frustrated by their sub-inflation returns, NCDs have emerged as a credible middle ground: steadier than equity, higher-yielding than FDs, and — when structured as secured NCDs — backed by real collateral.
Secured vs unsecured NCDs
The single most important distinction when evaluating an NCD issuance is whether it is secured or unsecured.
Secured NCDs are backed by specific collateral — typically a charge on the issuer''s real estate, receivables, or a pool of identified assets. If the issuer defaults, debenture holders have a claim against that collateral. The recovery process is governed by the Insolvency and Bankruptcy Code (IBC) and by the terms of the debenture trust deed.
Unsecured NCDs have no specific collateral. Holders rank as general creditors in a default scenario, ahead of equity shareholders but typically behind secured lenders. Unsecured issuances usually offer a higher coupon to compensate for the lack of collateral, but for conservative investors the risk-adjusted case for secured paper is almost always stronger.
How NCD coupons compare to bank FDs
Traditional five-year bank FDs currently yield around 6.5–7.5% p.a. Secured NCDs from well-rated issuers typically target 9–13% p.a., and asset-backed NCDs structured through Category II AIFs can target 14–18% p.a. depending on the underlying strategy and tenure.
That 3–8 percentage point spread is not free money. It reflects genuine differences in liquidity, credit risk, and regulatory protection. Bank FDs are insured by DICGC up to ₹5 lakh per account; NCDs are not. NCDs usually have a lock-in; FDs can be broken (at a penalty). Understanding this spread is the first step in deciding how much NCD exposure makes sense for you.
What to evaluate before investing
Five questions determine whether an NCD is worth your capital.
First, who is the issuer and what is their credit rating? CRISIL, ICRA, CARE and India Ratings assign grades from AAA (strongest) down to D (default). Investment-grade (BBB- and above) is the floor for most retail-friendly issuances. Below investment-grade paper can still make sense in a diversified Category II AIF but requires meaningfully more diligence.
Second, is the NCD secured, and what is the collateral? Read the trust deed. Check the loan-to-value (LTV) of the secured pool. A 60% LTV against residential real estate in a Tier-1 city is a very different risk profile from a 90% LTV against an undifferentiated receivables pool.
Third, what is the tenure and coupon payment schedule? Monthly-pay NCDs suit investors who need current income. Cumulative NCDs (where interest accrues and is paid at maturity) can suit long-term wealth builders, and may offer slightly higher effective yields.
Fourth, what is the call / put structure? Some NCDs give the issuer the right to redeem early (call); others give the investor the right to exit at specific dates (put). These features materially affect your actual holding period and reinvestment risk.
Fifth, how is the paper taxed? Interest on NCDs is taxable at your marginal income tax slab, just like FD interest. Capital gains on NCDs sold before maturity are taxed per standard capital gains rules. For HNIs in the highest slab, an AIF that holds NCD-style instruments as part of a broader portfolio may offer more efficient tax treatment via the Category II pass-through structure.
Where NCDs fit in a portfolio
For most Indian investors, NCDs belong in the fixed-income sleeve of a diversified portfolio — replacing or complementing FDs, short-term debt mutual funds, and traditional bonds. They are not a substitute for equity, and they are not appropriate as a sole holding.
A typical allocation might be 20–40% of the fixed-income sleeve in secured NCDs (from a mix of issuers and tenures), alongside some liquid bank FDs and short-duration debt funds for emergency liquidity. NRIs can invest through NRO accounts with TDS deducted at the applicable rate; the pass-through structure of NCD-focused Category II AIFs simplifies the paperwork.
The bottom line
NCDs are not glamorous, but they are useful. For investors who understand the difference between secured and unsecured paper, read the issuer''s credit profile, and size their exposure sensibly, NCDs offer genuinely better yields than bank FDs without the volatility of equity. In an Indian financial landscape where fixed deposits struggle to beat inflation, that combination of predictable income and asset-backed security is increasingly valuable.
