NCIB, which stands for Non-Convertible Debenture Issuance Program, is a debt instrument that companies use to raise capital from investors. NCIBs are popular in India and are commonly used by corporations as a means of funding. In this article, we will explore the various advantages of NCIB and why companies should consider using them to raise funds.
What is NCIB?
NCIBs are a type of debt instrument that are issued by companies to raise funds. They are called “non-convertible” because they cannot be converted into equity shares. NCIBs are essentially loans that the company takes out from investors, with a promise to pay back the amount with interest.
Advantages of NCIB
There are several advantages of NCIB, which make them an attractive option for companies looking to raise funds. Let’s explore some of these advantages in more detail.
1. No Dilution of Equity
One of the main advantages of NCIB is that they do not dilute the equity of the company. When a company issues shares, it dilutes the ownership of the existing shareholders. However, with NCIB, the company is only taking a loan and does not have to issue any shares. This means that the existing shareholders retain their ownership percentage in the company.
2. Flexibility in Terms
NCIBs offer a lot of flexibility in terms of repayment and interest rates. The company can choose the repayment schedule and the interest rate that suits its financial needs. This means that companies can tailor the terms of the NCIB to suit their specific financial requirements.
3. Lower Cost of Capital
NCIBs are a cheaper source of funding as compared to equity shares. The interest rates on NCIBs are generally lower than the cost of equity. This means that companies can raise funds at a lower cost and save on the cost of capital.
4. Diversification of Funding Sources
By issuing NCIBs, companies can diversify their funding sources. Instead of relying solely on bank loans or equity shares, companies can also raise funds through NCIBs. This diversification of funding sources can help companies manage their financial risks better.
5. Better Credit Rating
NCIBs are considered a more secure form of investment as compared to equity shares. This is because the repayment of the NCIB is a priority for the company, and failure to repay can result in legal action. As a result, companies that issue NCIBs are perceived as having a better credit rating.
6. Attractiveness to Investors
NCIBs are an attractive investment option for investors who are looking for a fixed income investment. NCIBs offer a fixed rate of interest, which is attractive to investors who want a predictable income stream. This means that companies can attract a wider pool of investors by issuing NCIBs.
In conclusion, NCIBs are an attractive option for companies looking to raise funds. They offer several advantages such as no dilution of equity, flexibility in terms, lower cost of capital, diversification of funding sources, better credit rating, and attractiveness to investors. By using NCIBs, companies can raise funds at a lower cost and manage their financial risks better.
1. How is NCIB different from convertible debentures?
NCIBs cannot be converted into equity shares, while convertible debentures can be converted into equity shares.
2. Are NCIBs a good investment option for investors?
Yes, NCIBs offer a fixed rate of interest and are considered a more secure form of investment as compared to equity shares.
3. Can companies issue NCIBs to raise unlimited funds?
No, there are certain limits on the amount that can be raised through NCIBs. Companies are required to adhere to the regulations set by the Securities and Exchange Board of India (SEBI) regarding the amount that can be raised through NCIBs.
4. What is the tenure of NCIBs?
The tenure of NCIBs can range from 1 year to 10 years, depending on the terms set by the company. Companies can choose the tenure that suits their financial needs.
5. What are the risks associated with NCIBs?
The risks associated with NCIBs are similar to other debt instruments. There is a risk of default if the company is unable to repay the amount borrowed. However, NCIBs are considered a more secure form of investment as compared to equity shares, as the repayment of the NCIB is a priority for the company.