Most of us are familiar with IPO issues, where a company offers its shares to the public. But have you heard of NCD IPOs? Nowadays, NCD IPOs are becoming increasingly popular as they offer investors a regular fixed interest income, but very few of us know what an NCD IPO is.
An NCD IPO is the public issue of debt securities by a company to raise capital. NCDs are non-convertible debentures or debt instruments that cannot be converted into equity shares.
In this article, you will learn all about what an NCD IPO is and the difference between an NCD IPO and Equity IPO.
NCD IPO Meaning
NCD stands for Non-Convertible Debentures and IPO for Initial Public Offering. Thus, NCD IPO full form is the public issue of debt securities by a company.
When a company offers or sells its debentures to the public, it is called an NCD IPO or Debt IPO.
A company can issue NCD IPO more than once if it needs funds. Each NCD issue has a fixed interest rate or coupon that is paid to NCD investors at regular intervals. NCDs also have a fixed maturity i.e. a few months to years. Once the NCD matures, the issuing company repays the principal amount invested along with the interest due to the investors.
Types of NCD IPO or Debt IPO
A company can offer two types of NCD issues, namely secured NCD and unsecured NCD issue.
- Secured NCD IPO: As the name suggests, secured NCDs are backed by the assets of the company. Thus, if the company fails to pay to debenture holders, assets will be sold out to repay lenders.
- Unsecured NCD Issue: Unsecured NCDs have no lien on the assets of the company and repayment depends on the creditworthiness of the issuer.
Therefore, it is advisable to check NCDs' credit rating by rating agencies like CRISIL, ICRA, Care Ratings, etc. NCD issues with a good credit rating are considered less risky than low-rated securities.
What is Equity IPO?
An equity IPO is the first-time issue of a company's shares to the public. An unlisted company can sell its shares to raise funds from the public. In an equity IPO, anyone who buys shares in the company becomes a shareholder or investor with a stake in the company.
A company can offer new shares (fresh issue) or the promoters can sell their shares to the public (offer for sale).
The funds raised through a public issue can be used for various purposes such as business expansion, general corporate purposes, strategic initiatives, purchase of new machinery or others.
Types of Equity IPO
There are two types of public issues: a book-building IPO and a fixed-price IPO.
- Book-building IPO: If the issuing company sets a price range, i.e. Rs 250 to 260 per share, it is called a book-building IPO. The lower price Rs 250 is called the floor price and the upper price Rs 260 is called the cap price or cut-off price. Investors can bid at any price within the price band and retail investors are allowed to bid at the cut-off price. The final allotment price is determined after the company receives subscriptions from investors.
- Fixed-price IPO: When a company issues shares at a fixed price, it is called a fixed-price IPO. For example, an IPO at a price of Rs 50 per share is called a fixed price issue.
Differences between Equity IPO and Debt IPO
Let's find out the key differences between Equity IPO Vs debt IPO.
| Basis of difference | Equity IPO | Debt IPO |
| Instrument | A company sells shares for the first time to investors. | A company issues debt securities to investors. |
| Source of funding | Public issue of shares is an equity source of funding. | Capital raised by issuing NCD is a debt capital. |
| Ownership | Investors are the shareholders who have ownership within the company. | There is no ownership transferred as investor is a lender to the company. |
| Returns | There is no fixed or assured returns as listing gains are affected by investors sentiment, public demand, and so on. | Debenture holder receives fixed interest income at a specified coupon rate. |
| Risk | High risk because an unlisted company does not have an established track record and listing success depends upon the sentiments. A successful IPO with huge demand can offer you high yield or vice-versa. |
NCDs have moderate risk and provides slightly greater returns than traditional bank FDs. |
| Price | IPO can be a fixed price issue or book-building issue offered at a price range. | FPO is usually offered at a discount to the current market price of share. |
| Minimum investment | The minimum investment in a mainline IPO is mostly between Rs 14000 to Rs 15000 and in SME IPO, it is Rs 1 lakh. | Minimum investment in NCD IPO is Rs 10,000. |
| Frequency | Only the first-time share sell offer by a company is called equity IPO, and the once shares are listed on the exchange, the company becomes a listed entity. Subsequent share sell offers after the IPO are called FPO or Further Public Offering. |
An NCD IPO can be issued multiple times in a year when the company needs funds. |
| Maturity | There is no maturity period and investors can sell shares immediately on the listing day or thereafter. | NCDs have a maturity period that can range from 90 days to 30 years. However, if needed, an investor can sell them on the exchange because NCDs are tradeable instruments. |
| How to Apply | Almost every broker offers online IPO apply through UPI. | Most of the broker do not offer NCD issues hence, you can instead apply through ASBA net banking using your demat account details or apply with other platforms like Golden Pi. |
| Allotment | In the retail category, shares are allotted through the lottery, and to HNIs, shares are allocated on a pro-rata basis. | Allotment of NCD is done on first come, first serve basis. |
End Note
NCD IPO is the best investment opportunity for low-risk retail investors. It is the best alternative to FD.
Investing in NCDs offers investors fixed regular interest income. If you do not want to stay invested till maturity, you can also exit before maturity by selling them on the stock exchange.
