Bonds and Non-Convertible Debentures (NCDs)
In the year 2014, the RBI announced that NRIs and other foreign nationals can invest in bonds and Non-Convertible Debentures (NCDs) that form a part of several Indian corporations. As a result, there has been a growth involving the role of NRIs in buying and selling of shares or debentures over the years.
The added push to such forms of investments came along with the rise of NRI real estate investments. As the interest of NRIs in investing in real-estate properties peaked, there was a significant need for other sources of capital generation in India. This resulted in the wave of bonds and non-convertible debentures.
Non-Convertible Debentures Vs Bonds
A major difference between NCDs and bonds is that while investing in NCDs, there is no requirement of mortgage or collateral whereas an investment in bonds requires the deposition of an investor’s asset.
NCDs are bonds linked with a loan. These serve as debt instruments for building financial capital over time. Bonds are another form of debt instrument where an investor can purchase bonds in various forms of public or private corporations and then sell them to gain some capital.
The contribution of NRI subscriptions to Indian bonds has increased tremendously over time. The interest rates have seen a consequent spike as well. What started at only 3.4% returns now stands tall with 20% interest rates over the long-term capital gains.
Why are Bonds and NCDs so popular with NRI Real Estate Investments?
NCDs and bonds provide the dual advantage of security as well as gain to NRI investors. Earlier, NRIs were skeptical about investing in the Indian market. While fixed deposits offered a safe investment, the change in economic trends has led to a downward trajectory of NRI investments. Currently, the rate of interest offered by FDs is between 5-7% that is low in comparison to the ones offered by NCDs and bonds. This drew the attention of several NRIs and foreign nationals and led to the popularity of NCDs and bonds.
The popularity of such investments is that an estimated Rs.8.82 billion have been gained by a total of five foreign companies by investing in NCDs in India. This has been done to improve the balance sheets of business corporations by improving their investment portfolios.
Coming to the NRI Real Estate Scenario, there has been liberalization in the investment conditions for NRIs in real-estate. NCDs and bonds help accumulate the capital assets to purchase real-estate and perhaps go for a loan.
The debt market in India paves way for low-risk and guaranteed returns. Bonds as debt securities help generate capital and cut the banking channels to remove the hassle of NRIs in having to deal with banks. Attractive offers such as ‘coupon rate’ or ‘interest rate’ add to the value of bonds.
Key Features of Bonds
- NRIs can make investments in the form of bonds using the ‘NRI window’
- There are different types of bonds available for NRIs such as Capital bonds, Public sector units, Corporate bonds, NCDs, Government tax-free NRI bonds, Treasury bills, Municipal bonds, etc.
- NRIs can buy and sell bonds using a Demat account.
- There is taxation on the interests earned from investments in bonds as per the ITA,1 961. However, there are certain tax-free government bonds designed for NRIs that offer tax exemptions.
- There is taxation on both long-term as well as short-term capital gains.
Key Features of Non-Convertible Debentures (NCDs)
- The tenure of NCD investments can be from 3 months to 30 years.
- Their interest rates are higher than those offered by fixed deposits in banks
- NRIs can invest in NCDs through NCD IPO.
- NCDs do not require collateral or assets from the issuer and only focus on the issuer’s credit and credit ratings
- NCDs are available through the stock exchange and listings of trade
- NCDs allotted to NRIs are shown in the Demat account.
- Interest rates on NCDs depend on the type of stock and it is fixed at a minimum of 3% for NRIs by the regulations of RBI.
- NRIs cannot make withdrawals from NCDs before 3 years.
- NCDs have to bear a TDS on their interests and returns.
- NRIs are required to issue a receipt of their remittances via NCD to RBI within 30 days of investing.
Procedure for NRIs to Invest in Bonds and Non-Convertible Debentures (NCDs)
NRIs can invest in bonds or NCDs on both repatriable and non-repatriable basis.
- Repatriable basis: Here, NRIs can apply for investment in bonds or NCDs using the bank account or NRE account linked with Demat. The candidates can apply both online or offline. Online applications can be submitted by attaching important documents. Offline applications require an NRE account linked draft.
- Non-repatriable basis: Under such investment, the NRO account is involved. NRIs can submit applications with bank accounts linked with Demat. Similar to the above, offline applications require an NRO bank account draft.
NRIs can check for the availability of bonds and NCDs during the period when the bonds are offered by various units of corporations. The purchase of bonds is categorized under the subscriptions opted by NRI candidates. These subscriptions can be completed using online platforms or by appointing a PoA or power of attorney who can apply for bonds on behalf of the investor.
Bond sales: After the purchase of bonds or NCDs, NRIs can either sell the bonds in the stock exchange or hold these bonds until maturation. After the bonds reach their maturity, the issuer will pay the full value to the NRI investor. As mentioned above, NRIs can sell and purchase bonds using only Demat accounts.
The introduction of NRI bonds has been beneficial in boosting the value of the Indian rupee and economy. Bonds and NCDs create a profitable opportunity for NRI investors as they are a secure form of investment with an assurance of returns. Considering their growth, these forms of investments are sure to increase as more companies allow NRIs to purchase bonds and stock. One can also check out the best deals on NCDs and bonds on Assetmonk– the one place for all the investment information.
Bonds and Non-Convertible Debentures FAQ's:
Yes, NRIs could easily invest in the Government of India Bonds without any of the prevailing ceiling limits in some pre-specific modes.
RBI (The Reserve Bank of India) has brought up a new channel, which operates separately, and is called ‘FAR’ (Fully Accessible Route). This was introduced by the RBI in order to enable the NRIs to invest in the pre-specified government bonds.
Yes, one can purchase NCDs online. And when compared to certain fixed-rate investment modes, this option (NCD) might offer more returns. Overall, if one is considering to diversify his/her portfolio, also reducing the risk exposure, one can opt for NCDs, as they provide assured fixed return and is a great option.
NCDs could be either purchased in the public issue or from the Stock Exchanges directly as the majority of the NCDs are already listed on the NSE. NCDs are often traded at a 2% discount to their original fair value on certain exchanges, this actually makes it quite an attractive mode for investment through the Secondary markets.
Yes, but If one sells an NCD before it’s Maturity, then the effective return rate would be less than the face value rate, in other words, the rate at which the buying price was already calculated. The return on the NCD would be fixed when held until Maturity, so if the interest rates increase during the term one should not expect to receive any benefit from that increment.
Mostly NCD is transferable, but the protected NCD might not necessarily be transferable to some other insurer. In case one does have an NCD Protector, it would also not protect the individual against the cancellation or non-renewal of the policy by the insurer. Also, one is advised to check with an insurer if the NCD protection cover is available.
NCDs are financial instruments that raise money from the public through the enforcement of a debt paper for a fixed tenure. NCDs could not be converted into equity shares or debentures. Upon maturity, the principal amount including the accumulated interest would be paid to the holder of that NCD.
To invest in the NCDs, one must have a Demat account. This is because, NCDs are issued in the Demat mode. This way it is not only quicker but also simpler and cost-effective. The NCDs (Non-convertible debentures) is certain debt instruments that are issued by the companies to raise funds
The NCDs are taxed at the individual’s slab rate, which means if one is in the highest tax bracket, the total interest he/she earns would be taxed at 30%. Therefore, the post-tax returns are expected to be much lower. NCDs could work for those in the lower tax slabs and also for those with no taxable income.
One can check the details by visiting the company’s nearest branch. Alternatively to check it one can simply log in to the respective online account, refer to the details under my account section, and check the NCD rating.