Why in the news?

  • The Securities and Exchange Board of India (SEBI) on Friday proposed amendments to harmonise regulations governing entities that issue non-convertible securities.

Non-Convertible Securities

  • What is it?:
    • Non-Convertible Securities (NCS) refer to financial instruments that cannot be converted into equity shares of the issuing company. 
    • They are fixed-income instruments.
    • They are issued primarily to raise debt capital from investors for long-term financing needs such as expansion, infrastructure, or working capital.
  • Major Types:
    • Non-Convertible Debentures (NCDs): It is a debt instrument issued by companies to raise capital, offering a fixed rate of interest but without the option to convert into equity shares.
      • Regulated by SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.
    • Non-Convertible Redeemable Preference Shares (NCPS): These are preference shares that cannot be converted into equity shares but are redeemable after a fixed period.
    • Non-Convertible Bonds (NCBs): It is a fixed-income financial instrument issued by a company to raise long-term capital.
      • Used to finance infrastructure or long-term projects.
  • Key Features:
    • Fixed Returns: Predetermined interest or dividend rates.
    • No Ownership Dilution: As they are non-convertible, they don’t affect company shareholding.
    • Credit Rating: Rated by agencies like CRISIL, ICRA, or CARE.
    • Listing: Can be listed on stock exchanges for liquidity.
  • Regulation:
    • Governed by SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.
    • Issuers must obtain credit rating, appoint a debenture trustee, and create a debenture redemption reserve.
  • Advantages:
    • Predictable and stable income for investors.
    • Lower risk compared to equities.
    • Suitable for conservative or institutional investors.
    • Tax benefits available in some categories (e.g., infrastructure bonds).
  • Disadvantages:
    • No potential for capital appreciation (unlike convertible instruments).
    • Exposed to interest rate risk and credit/default risk.
    • Limited liquidity compared to shares.