Credit Rating and Non-Convertible Debentures (NCDs)

Non-convertible debentures are among the most common capital market debt instruments issued by Indian companies, and a current credit rating is central to both their regulatory issuance requirements and to how investors — retail and institutional alike — evaluate and price them.

What a Non-Convertible Debenture Is

A non-convertible debenture, commonly abbreviated NCD, is a debt instrument that cannot be converted into equity shares of the issuing company, distinguishing it from a convertible debenture. NCDs are issued by companies to raise medium- to long-term funds directly from investors, either through a public issue open to retail and institutional investors, or through a private placement to a more limited group of typically institutional or sophisticated investors, a distinction covered in considerably more depth in the dedicated public-issue-versus-private-placement article elsewhere in this pillar. NCDs can be secured, backed by specific charge on the issuer's assets, or unsecured, and this security status itself is a significant factor rating agencies and investors both weigh in assessing the instrument.

The Regulatory Role of Rating in NCD Issuance

SEBI's regulatory framework governing the issue and listing of non-convertible securities requires issuers to obtain and disclose a credit rating from a SEBI-registered credit rating agency as part of the mandatory disclosure requirements for both public issues and, in many cases, privately placed NCDs that are subsequently listed on a stock exchange. This rating must generally be current, and issuers are typically required to disclose the rating rationale, along with any subsequent rating actions taken over the life of the instrument, as part of their ongoing disclosure obligations under SEBI's listing regulations, discussed further in the dedicated article on listing obligations and disclosure requirements elsewhere in this pillar.

How the Rating Influences Investor Demand and Pricing

Beyond the regulatory requirement, an NCD's rating category is one of the single most significant factors influencing the coupon rate an issuer must offer to attract sufficient investor demand, and the depth and breadth of the investor base that is even eligible or willing to participate. Higher-rated NCDs generally attract a broader base of institutional investors, including many mutual fund schemes, insurance companies, and provident fund trusts subject to minimum rating thresholds under their own respective regulatory frameworks, and can typically be priced at a comparatively lower coupon than a similar instrument from a lower-rated issuer, reflecting the market's differing risk perception.

For issuers at the lower end of the investment-grade rating spectrum, or for instruments not rated at all, the investor base narrows considerably to a smaller pool of investors specifically willing and permitted to take on higher credit risk in exchange for a correspondingly higher coupon — a dynamic that can materially affect both the feasibility of an issue and the ultimate cost of funds.

Secured vs Unsecured NCDs and How Rating Interacts With Security

Rating agencies explicitly factor the security status of an NCD into their assessment of that specific instrument, generally assigning a somewhat more favourable instrument rating to a secured NCD, backed by an identifiable charge on specific assets, compared to an otherwise similar unsecured instrument from the same issuer, reflecting the different recovery prospects investors would face in a default scenario. Issuers should be aware that an NCD's specific instrument rating can therefore differ from the issuer's general corporate or long-term issuer rating, depending on the specific security package and structural features of that particular instrument.

Ongoing Surveillance Through the NCD's Tenure

Once issued, an NCD's rating remains subject to ongoing surveillance for the full tenure of the instrument, similar in principle to the surveillance process described in detail in the dedicated surveillance pillar of this content series. Because NCDs are typically held by a wide investor base, including retail investors who may not have the resources to independently monitor the issuer's evolving financial position, rating agencies and issuers alike bear a particular responsibility to ensure surveillance reviews and any resulting rating actions are communicated promptly and are genuinely reflective of the issuer's current position.

Illustrative Example

Consider a hypothetical mid-sized housing finance company planning a public issue of secured NCDs to fund its lending book, seeking a rating from a recognised agency ahead of the issue. The company achieves an AA-category rating for the secured instrument, reflecting both its own overall credit strength and the specific comfort the security package provides, which the company's investment bankers indicate should support a comparatively competitive coupon rate and broad eligibility among institutional investors including several mutual fund debt schemes. A smaller peer company in the same sector, issuing a comparable but unsecured NCD and achieving only an A-minus rating for that specific instrument, finds it needs to offer a meaningfully higher coupon to generate comparable investor interest, and discovers that several institutional investors it had hoped to attract are simply not eligible to participate given their own internal or regulatory minimum rating thresholds — illustrating how both the rating category and the specific instrument structure jointly shaped the two companies' quite different fundraising experiences.

Frequently Asked Questions

Is a credit rating mandatory for all NCD issues, including small private placements?

Requirements vary by the specific issuance route and whether the instrument is subsequently listed; companies should confirm the current applicable SEBI requirement for their specific issuance structure and size before assuming a rating is or is not required.

Can an NCD carry a different rating from the issuer's overall corporate rating?

Yes, an NCD's specific instrument rating reflects both the issuer's general creditworthiness and the specific structural features of that instrument, including its security status and tenure, and can therefore differ from the issuer's broader corporate or long-term rating.

Do retail investors in an NCD public issue see the same rating information as institutional investors?

Yes, the rating and rating rationale are generally disclosed in the offer document made available to all investors in a public issue, giving retail investors access to the same rating information as institutional participants, though retail investors may be less likely to read the full detailed rationale in practice.

What happens to an outstanding NCD's rating if the issuer's financial position deteriorates?

The rating is subject to ongoing surveillance and can be downgraded if warranted, similar to the surveillance process for other rated instruments, with the downgrade disclosed to the market and factored into the instrument's subsequent trading price if it is listed.

Talk to FinMen Advisors — for help preparing for a rating exercise, write to marketing@finmen.in or call +91 77387 14680.

Disclaimer: This article is intended for general informational and educational purposes only and does not constitute financial, credit, investment, or legal advice. Credit ratings are assigned solely by SEBI-registered Credit Rating Agencies (such as CRISIL, ICRA, CARE Ratings, India Ratings, Brickwork, Acuite, and Infomerics) based on their own methodologies, policies, and the information available to them at the time of assessment. FinMen Advisors provides preparatory and advisory support to companies undergoing a rating exercise and does not issue, influence, or guarantee any rating outcome. Readers should exercise independent judgement and consult qualified professionals before making business or financial decisions.