While the term Initial Public Offering IPOis something that most investors are familiar with, conjuring visions of companies going public and stocks hitting the market, there is a lesser-known but equally intriguing realm that often slips under the financial radar – the world of NCD IPOs. For many, it is like unearthing a treasure trove from the deep and vast ocean of financial investment options.

The buzz around Equity IPOs is often loud and clear so much so that you often have coffee-time discussions ahead of a big company's IPO, however, the melody of Non-Convertible Debenture NCD IPOs is just a mere vibration, only felt by a select few. If you are someone who has felt the vibration of NCD IPOs and wants to tap into this unexplored territory, then here are 4 things that you ought to keep in mind before investing in NCD IPOs.

Whether you're a seasoned investor or someone dipping their toes into the vast sea of finance, understanding the dynamics of NCD IPOs is crucial before making any financial commitments.

Understanding NCDs:

Let's start by demystifying Non-Convertible Debentures. Debentures are long-term financial instruments that acknowledge a debt obligation of the issuer. In this context, an issuer is a Company that issues the debentures and the debenture holder is the investor aka you! If this is still complicated for you, Imagine these as loans that you provide to companies, but instead of getting just your principal back, you receive regular interest payments. It's like being the bank for a company but with the potential of earning higher interest returns than your average savings account.

Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner. The debentures which can't be converted into shares or equities are called non-convertible debentures or NCDs.

There are two types of debentures: Secured and Non-Secured.

What are Secured Debentures?

Think of secured NCDs as the crème de la crème section of the investment world. These debentures have a safety net – they're backed by the company's assets. If, by some unfortunate turn of events, the company can't keep up with its financial promises, these assets act like a cushion. They can be liquidated, and the proceeds can be used to pay back the company's lenders. It's like having collateral for your loan, ensuring a safety cushion for the lenders.

What are Unsecured NCDs?

Now, let's dive into the riskier side of the spectrum – unsecured NCDs. These are the daredevils of the investment world, not tethered to the company's assets. Without that safety net, they are high-risk and hence offer higher yields as a sort of compensation for the risk they carry. It is like taking part in an adventure sport- the excitement and thrill will be very high in this case higher returns but there is always a level of risk and uncertainty. In case the debentures are unsecured there is no specific collateral to fall back on.

Why Do Companies Issue Non-Convertible Debenture?

Companies use NCDs to get long-term funds from the public. Unlike other debentures that can convert into shares, NCDs don't have that feature. To make it more attractive for investors, companies offer a higher interest rate on NCDs. It's giving a little extra to make the deal more appealing.

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5 Key Points to Consider When Investing in an NCD IPO

1. Credit Rating

Credit Rating determines how safe your investment is in this particular debenture. A credit rating is a grade given to a bond by a credit rating agency that helps in understanding whether the issuer of the bond i.e. the company is financially sound or not.

For eg: Imagine you're loaning money to a friend. Wouldn't you want to know how reliable they are in paying you back? Similarly, check the credit rating of the company issuing the NCDs. Higher ratings generally mean less risk for you. For instance, a credit rating of AAA will be given to a friend who's never missed a payment.

The rating agencies evaluate the ability of an entity to fulfill all its obligations to the debenture holder within the predetermined period. The rating agency could be a government, a corporation, or an individual. The primary reason for an assessment done by a credit rating agency is to determine the possibility of a debtor defaulting. It equally represents the credit risk associated with debt instruments whether a loan or a bond.

The evaluation process is done by analyzing the information provided by the debtor through its financial statements, annual reports, and sources such as industry analysis, published articles, and other projections. The Securities and Exchange Board of India regulates all credit rating agencies in India.

So therefore when you are looking to invest in a NCD issue it is important to make note of the credit rating. Remember that a credit rating assigned to a debenture is not fixed, it may change with the performance and the fundamentals of the company. Any downrating of the debenture of a company is announced by the rating agency.

2: Strong Company foundation

Now, unlike your money parked in a bank, which is insured up to ₹1 lakh, investing in non-convertible debentures (NCDs) doesn't come with that safety net. But fear not! As an NCD investor, you get priority if the company hits a rough patch and has to shut shop – you have the first dibs on its assets. However, this golden ticket is only valuable if the company has enough assets to go around. So, before you jump into the investment pool, do some financial detective work. Check if the company is well-funded and flaunts a healthy book value.

Example: Think of it like buying a house. You would want to buy a house that can be sold in the market and gives you value. However, if the house is in a region that has less connectivity to other parts of the city, and has no facilities then for sure you will not be able to easily sell your house. Similarly, understanding and doing thorough research about the company's fundamentals sets the foundation for a strong investment.

3. Investment Liquidity

Unlike a bank FD, an NCD can be sold on the market. You will usually come up with articles saying that NCDs have liquidity as they can be sold in the market. However it is wise to check the amount of liquidity for the particular NCD you opt to purchase. This can be checked by studying the liquidity of the past NCDs issued by the same company. There have been instances where some NCDs have not seen high liquidity.

Example: Let's say you buy a limited-edition gadget. It's cool, but what if you want to sell it later? You'd hope there's a market for it. Similarly, assess how easily you can buy or sell NCDs in the secondary market. It's like having an exit strategy – just in case you want to cash in.

4. Put and Call Option:

Often NCDs come with an option called put and call. The put option gives the investor the right to sell the NCD back to the company after a specified period, while the call option gives the right to the company to retire the NCDs before the maturity date. This is like a safety net for the company as during a falling rate environment, the company can reduce its loss. The put option is beneficial for the inve, store in a rising rate scenario. However, it is important to note that a call option offers a higher rate of returns to investors as the NCD favors issuers.

Example: Think of the put-and-call option as a flexible gym membership. If you decide it's not for you, you can put it on hold or cancel it. Similarly, some NCDs come with options that allow you to exit or extend your investment. However, be wary – too many options might not always be a good thing.

4. Post Tax Yield:

The yields that you see advertised by issuers do not tell you the whole story - the tax part of it is left out! A lot like buying a product online and realising there are additional tax charges to be paid at the checkout. Likewise, any income that one earns from NCDs is added to the total income of the year and taxed at the normal rate. So, before you get too excited over the advertised yields, it's wise to consider the tax implications and see if the deal is as sweet as it seems on the surface.

Example: Picture this – you get a bonus at work, but then you realize a chunk is taken out for taxes. Similarly, when evaluating NCD returns, look beyond the headline interest rate. Consider taxes to get a real sense of what you'll take home. It's like looking at your net salary rather than the gross amount.

Now, that you know about the five important points to consider before investing in an NCD IPO, let us take a look from where and how you can invest in NCDs.

Where can you buy NCDs?

The issuing company begins the public issue of its NCD for a specified period. NCDs are listed on the stock exchange after that as specified by the company. Think of the issuing company as opening a limited-time opportunity for people to invest in their Non-Convertible Debentures (NCDs).

After this initial phase, the NCDs make their way to the stock exchange, making them available to a wider audience.

You can access a wide range of AA to AAA rated NCD IPOs through brokers such as Bondskart. At present, the NCD IPO issue of UGRO Capital is going to open on 8th February and will continue till 21st February. Through bondskart.com you can easily invest in NCD IPOs by following a quick three-step process.

As we wrap up this article on NCD IPOs, remember that they are like a unique dish – rich in flavor but requiring a discerning palate. Stay with us as we unpack the often confusing world of the debt market to help you navigate it better and equip you to make informed investment decisions, Ready to dive in? Visit bondskart.com and start your NCD IPO journey today.