Fixed Deposit vs Non Convertible Debentures (NCD's)

Companies borrow money for various purposes - be it expansion plan or repay existing loan or acquire new companies etc. When this borrowing results in increased business and increase in profits, the companies flourish.

Both Fixed deposits and NCD's are used to raise funds. But many investors are familiar with FD's than NCD's. But the actual fact is NCD is much more sensible than a Fixed deposit. Below mentioned would explain them why:

Fixed Deposits:

• Fixed deposits are classified as unsecured liabilities.
• Fixed deposits invested for fixed period will get fixed interest.
• If you wish to pre-close, then it is usually done with a reduction (penalty) in interest rate.
• Fixed deposits can only be preclosed and cannot be transfered to another persons name.
• Partial withdrawal of fixed deposits are not allowed. Either you need to retain it fully or close it fully.
• Fixed deposits are usually open for investments through out the year.
• Usually fixed deposits are fully alloted against your investment.
• Upon maturity you would get back your principal apart from the interest.

Typically fixed deposits are rigid in nature.

Debentures: 

• Debentures are again fixed interest yielding investments, but may be secured or unsecured in nature.
• Secured debentures are usually in good demand - given the mortgage backed security.
• They are again for fixed period yielding fixed interest rate.
• They are usually open for investment during specific period when the debenture issue is opened.
• These debentures on allotment are listed on stock market. You have the option to sell it before the maturity date at market price. There is no penalty for selling it in the secondary market.
• Since they can be sold in the stock market, debentures are usually transferable. There is no penalty transfering these NCD's.
• If the face value of a Debenture (NCD) is Rs.1000 and you hold 100 such NCD's, you may sell in multiple of one unit and retain the balance. In other words, partial selling is possible.
• There is a possibility of getting higher price in the stock market depending on the demand for this secured debentures.
• Hence there is a chance of Principal + Interest + capital appreciation + partial withdrawal option any time during the year.
• If you donot sell these debentures in the stock market, upon maturity, you get back your Principal apart from the interest.
• Usually companies raise debentures for certain corpus - say Rs.500 crores for specific window period. Hence if there has been huge demand, then there is a possibility of over subscription. Hence, at times, full allotment may not be possible.

Tax Treatment on NCD's:

• Debenture interest are taxable.
• NCD's alloted in demat mode donot have TDS.
• NCD's alloted in Physical mode have TDS on interest above Rs.5000.