Corporate Bonds in India : Meaning, Types, How to Invest, Ratings, Yield & Risk

What Are Corporate Bonds?

Corporate bonds are debt securities issued by companies (corporations) to raise money from investors. When you buy a corporate bond, you are essentially lending money to the company. In return, the company promises to pay you a fixed (or floating) interest rate  called the coupon  at specified intervals (monthly, quarterly, half-yearly, or annually), and to return your principal (face value) at maturity.

Unlike buying shares (equity), buying bonds does NOT give you ownership in the company. Bond investors are creditors they have a prior claim on the company’s assets compared to equity shareholders in the event of liquidation.

In India, corporate bonds are also widely known as Non-Convertible Debentures (NCDs) when issued to the public, or commercial paper and bonds in the institutional market. They are regulated by SEBI (Securities and Exchange Board of India) for listed securities and follow Ind AS 32 and 109 for accounting classification.

Key Takeaways

• Corporate bonds are debt instruments  you lend money to a company and receive interest + principal
• Key terms: Face value, coupon rate, maturity date, yield to maturity (YTM), credit rating
• Types: NCDs (public issue), commercial paper, green bonds, infrastructure bonds, AT1 bonds, Masala bonds
• Credit ratings (AAA to D) by CRISIL, ICRA, CARE, India Ratings determine risk and pricing
• Price and yield move inversely  when bond prices rise, yields fall, and vice versa
• Tax: Interest income taxed at slab rate; capital gains on listed bonds held > 12 months taxed at 12.5% (Budget 2024 change)
• Corporate bonds offer higher yields than government securities/FDs but carry higher credit risk
• AT1 (Additional Tier 1) bonds are high-risk perpetual instruments  YES Bank AT1 write-down in 2020 is a cautionary tale

How Corporate Bonds Work Key Terminology

1. Face Value (Par Value)

The principal amount the bondholder will receive at maturity. Most Indian corporate bonds have a face value of ₹1,000 or ₹10,000 per bond (for retail NCD issues) or ₹10 lakh to ₹1 crore (for institutional bonds).

2. Coupon Rate

The annual interest rate paid on the face value of the bond. Expressed as a percentage. - A bond with face value ₹1,000 and coupon rate 9% pays ₹90 per year in interest - Coupons can be fixed (most Indian corporate bonds) or floating (linked to a benchmark rate like repo rate or MCLR)

3. Maturity Date

The date when the bond “matures” and the issuer repays the face value to the bondholder. Indian NCDs typically have maturities of 1–10 years. Infrastructure bonds can be 10–30 years. AT1 bonds are perpetual (no maturity date).

4. Yield to Maturity (YTM)

The total annualised return an investor earns if they buy the bond at the current market price and hold it until maturity, including all coupon payments and the difference between purchase price and face value.

YTM is the most accurate measure of a bond’s return, accounting for the price paid.

YTM Example: You buy a bond with face value ₹1,000, coupon 9%, 5 years to maturity, but you pay ₹950 in the secondary market. Your YTM will be higher than 9% because you’re getting ₹1,000 back at maturity (₹50 capital gain) plus ₹90/year interest on only ₹950 invested.

5. Credit Rating

An independent assessment of the issuer’s ability to repay the bond. Higher rating = lower risk = lower yield (because investors accept lower return for safety). Lower rating = higher risk = higher yield (investors demand more return for taking credit risk).

6. Bond Price and Yield The Inverse Relationship

When interest rates rise in the market, existing bond prices fall (and yields rise).
When interest rates fall in the market, existing bond prices rise (and yields fall).

This is the most important concept for bond investors to understand.

Why? If a bond pays 8% coupon and market rates rise to 10%, no one will pay face value for an 8% bond when new bonds offer 10%. So the price falls until the effective yield matches the new market rate.

Types of Corporate Bonds in India

1. Non-Convertible Debentures (NCDs)

The most common form of corporate bond available to retail investors in India. “Non-convertible” means they cannot be converted into equity  unlike convertible debentures.

Public Issue NCDs: Offered through a public offer document (filed with SEBI), listed on BSE/NSE for liquidity. Available to retail investors in small lots (₹10,000–₹1 lakh minimum).

Private Placement NCDs: Issued to a select group of institutional investors (maximum 200 investors per fiscal year for private placement). Not publicly offered.

Secured vs. Unsecured NCDs: - Secured NCDs: Backed by specific assets of the company (PP&E, receivables)  if the company defaults, secured NCD holders have a charge on those assets. Safer. - Unsecured NCDs: No specific asset backing  only general claim on company assets. Higher yield but higher risk.

Frequent NCD Issuers in India: Muthoot Finance, Bajaj Finance, Mahindra Finance, Tata Capital, Shriram Finance, Piramal Capital, L&T Finance, HDB Financial Services.

2. Commercial Paper (CP)

Short-term unsecured promissory notes issued by corporates with high credit ratings (AA or above required by RBI) for tenures of 7 days to 1 year. Issued at a discount to face value (zero-coupon). Minimum denomination: ₹5 lakh.

Commercial paper is primarily an institutional instrument (banks, mutual funds, FIIs buy CP). It allows top-rated companies to raise short-term working capital at rates lower than bank loans.

3. Infrastructure Bonds

Long-tenure bonds (10–15+ years) issued by infrastructure companies (NHAI, IRFC, PFC, REC) or eligible companies for infrastructure projects. Some infrastructure bonds have offered tax benefits under Section 80CCF historically (though this specific benefit has been modified over the years). Guaranteed by the government for PSU issuers.

Current Status: Sovereign-backed PSU bonds (NHAI, IRFC) are quasi-government instruments  very safe, listed on exchanges, and widely held by insurance companies and pension funds.

4. Green Bonds

Bonds where proceeds are specifically earmarked for environmentally sustainable projects  renewable energy, energy efficiency, clean transportation, sustainable water management, pollution prevention.

India’s Green Bond Market: Growing rapidly. SEBI issued the Securities and Exchange Board of India (Issue and Listing of Green Debt Securities) Regulations, 2023, which require: - Third-party verification of green credentials - Annual impact reporting - Ring-fencing of green bond proceeds

Notable Indian Green Bond Issuers: ReNew Power, Adani Green Energy, Power Finance Corporation (PFC), Indian Railway Finance Corporation (IRFC), Yes Bank, Greenko.

India’s sovereign green bond: Government of India issued its first sovereign green bond in January 2023  ₹16,000 crore a landmark for the Indian sustainable finance market.

5. AT1 Bonds (Additional Tier 1 Bonds)

Perpetual, subordinated instruments issued by banks to bolster their Tier 1 capital (as per Basel III norms). They are: - Perpetual: No fixed maturity date  the bank can call them after 5 years (call option) - Coupon cancellable: The bank can skip interest payments at its discretion without it being a default - Write-down risk: If the bank’s CET1 (Common Equity Tier 1) ratio falls below a trigger (5.5%), the AT1 bonds can be written down to zero  meaning investors lose their entire investment

AT1 bonds are HIGH-RISK instruments suitable only for institutional investors who understand perpetual subordinated debt.

6. Masala Bonds

Rupee-denominated bonds issued in international markets (to international investors). Proceeds are received in foreign currency, but the bond is denominated and repayable in INR. The exchange rate risk is borne by the FOREIGN investor (unlike ECBs where the Indian company bears the forex risk).

Masala bonds were named to promote Indian brand abroad. Issuers: HDFC, NTPC, IR, state governments. Regulated jointly by RBI (for external commercial borrowings) and SEBI (for listing).

7. Zero Coupon Bonds

Bonds that pay no periodic interest issued at a deep discount to face value and redeemed at face value at maturity. The difference between issue price and redemption price is the investor’s return. Tax treatment: The imputed interest is taxed annually (even though no cash is received), creating a tax cash flow mismatch for individual investors.

Example: Zero coupon bond with face value ₹1,000, 3 years, issued at ₹750. The investor’s return: ₹250 over 3 years.

8. Floating Rate Bonds

Bonds where the coupon is linked to a benchmark rate (MIBOR, repo rate, T-bill yield) and resets periodically (monthly, quarterly, half-yearly). Protects investors from rising interest rate risk as rates rise, the coupon also rises.

Government floating rate savings bond: 7.75% FRB issued by RBI is an example of a retail floating rate bond, though it’s government rather than corporate.

Corporate Bonds vs. Government Securities (G-Secs) vs. FDs

How to Invest in Corporate Bonds in India

Option 1: Primary Market  NCD Public Issue

When a company launches a new NCD issue, you can apply: - Through your broker’s trading app (Zerodha, Groww, Angel One) - Through the company’s ASBA bank application - Apply for minimum lot sizes (usually 10 bonds × ₹1,000 face value = ₹10,000 minimum)

Monitor BSE and NSE websites for upcoming NCD issues.

Option 2: Secondary Market  BSE/NSE Bond Platform

Buy listed bonds through your demat account, just like buying stocks: - Go to your broker’s bond/debt section - Search for the bond by ISIN or company name - Check current price, yield, credit rating, and maturity - Place buy order

Liquidity Warning: Unlike equities, many listed corporate bonds have thin secondary market liquidity  the bid-ask spread can be wide, and large orders can move the price significantly.

Option 3: SEBI’s Bond Platform  BSE Bond Platform

BSE’s electronic bond platform enables retail investors to transact in corporate bonds online. Minimum investment: ₹10,000. RBI Retail Direct also facilitates access to government securities.

Option 4: Debt Mutual Funds

The most accessible way for retail investors to access corporate bonds  through SEBI-regulated debt mutual funds: - Corporate Bond Funds: Invest at least 80% in AA+ and above-rated corporate bonds - Short Duration Funds, Medium Duration Funds, Credit Risk Funds  varying duration and credit quality exposures - Benefits: Professional management, diversification, daily liquidity, SIP option available

Option 5: IndiaBonds, GoldenPi, Wint Wealth (Fintech Bond Platforms)

Fintech platforms that aggregate bond listings and allow retail investors to buy bonds in smaller lots: - IndiaBonds.com: Wide range of listed bonds, minimum ₹1,000 - GoldenPi: Corporate bonds, government securities, sovereign gold bonds - Wint Wealth: Pre-vetted bonds with detailed analysis; focus on higher-yield bonds

Tax Implications of Corporate Bonds in India (Post-Budget 2024)

Interest Income

• Taxed as “Income from Other Sources” at the investor’s applicable income tax slab rate
• TDS (Tax Deducted at Source): 10% TDS on interest paid if > ₹5,000 per financial year (for listed debentures) or > ₹5,000 (for unlisted debentures)
• NRIs: TDS at 30% on interest income (treaty relief may apply)

Conclusion

Corporate bonds occupy a crucial middle ground in India’s investment landscape  offering higher yields than government securities and bank FDs, with more predictable returns than equities, while carrying credit risk that must be carefully evaluated. For investors comfortable with the credit analysis process and the tax implications, AA-rated and above corporate bonds can be an excellent addition to a diversified portfolio.

India’s corporate bond market is growing and deepening with SEBI’s ongoing initiatives to improve transparency, liquidity, and retail access, the market is becoming more accessible to ordinary investors beyond institutional players. Green bonds, ESG-linked bonds, and social bonds are adding new dimensions aligned with sustainability goals.

For businesses considering debt capital markets to fund expansion  whether through NCDs, commercial paper, or infrastructure bonds AU Small Finance Bank’s treasury and capital markets team can advise on optimal debt structures, market timing, and regulatory compliance. For individual investors, AU Small Finance Bank’s wealth advisory services can help structure a bond portfolio appropriate for your risk tolerance, tax bracket, and investment horizon.

Frequently Asked Questions (FAQs)

How is corporate bond interest taxed in India?

Interest income is taxed at your income tax slab rate (20% for income ₹12–15 lakh; 30% for income >₹15 lakh). 10% TDS is deducted at source if interest exceeds ₹5,000 per year. Capital gains on sale: LTCG at 12.5% for bonds held > 12 months; STCG at slab rate for ≤ 12 months.

What is the difference between bonds and debentures in India?

In practice, they are often used interchangeably. Technically, bonds are typically secured by specific assets; debentures may be secured or unsecured. In Indian legal and market parlance, “NCD” (Non-Convertible Debenture) is the most common term for corporate debt issued to the public.

What is the minimum investment in corporate bonds?

For retail NCD public issues: Typically ₹10,000 (10 bonds × ₹1,000 face value). On secondary market bond platforms (IndiaBonds, GoldenPi): ₹1,000–₹10,000. For institutional bonds: ₹10 lakh–₹1 crore.

How liquid are corporate bonds in India?

Listed NCD bonds can be sold on BSE/NSE through your demat account but liquidity varies greatly. AAA-rated bonds from large issuers are more liquid. Smaller issuers and lower-rated bonds may have very thin secondary market trading.

What are AT1 bonds and why are they risky?

AT1 (Additional Tier 1) bonds are perpetual, subordinated bonds issued by banks to boost Tier 1 capital. They carry extreme risks: coupons can be skipped, the bond can be written down to zero if the bank’s capital ratio falls below a threshold. YES Bank wrote down ₹8,415 crore of AT1 bonds to zero in 2020. SEBI now requires minimum ₹1 crore investment for AT1 bonds.

What is a credit rating and how does it affect bond investment?

A credit rating (AAA to D) is an independent agency’s opinion on the issuer’s ability to repay. Higher rating = lower risk = lower yield. Lower rating = higher risk = higher yield. Investment-grade is BBB- or above; below BBB- is speculative/junk. Always invest in investment-grade bonds (AA or above for retail investors).

This article is for informational and educational purposes only and does not constitute investment advice. Bond investments carry credit risk and market risk. Please read all offer documents carefully and consult a SEBI-registered investment advisor before investing in corporate bonds.

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