Corporate Bonds in India: A Complete Guide

Introduction: The Debt Side of Capital Markets

“While equity gets the headlines, bonds quietly fund most of corporate India.”

Corporate bonds—debt securities issued by companies—form a crucial but often overlooked part of capital markets. They offer investors steady income, lower volatility than equity, and portfolio diversification. For companies, they provide an alternative to bank loans for raising capital.

What Are Corporate Bonds?

Definition

Corporate bonds are debt instruments issued by companies to raise capital. Investors who buy bonds are lending money to the company in exchange for periodic interest payments and return of principal at maturity.

Bond Terminology

How Bonds Work

Example:

• Face Value: ₹1,00,000
• Coupon: 9% annual
• Maturity: 5 years

Cash Flows:

• Year 1-4: ₹9,000 interest each year
• Year 5: ₹9,000 interest + ₹1,00,000 principal

Total Return: ₹45,000 interest + ₹1,00,000 principal = ₹1,45,000

Types of Corporate Bonds

By Security

1. Secured Bonds (Debentures)

• Backed by company assets
• First charge on specific assets
• Lower risk, lower yield
• Common in India

2. Unsecured Bonds

• No specific collateral
• Higher risk, higher yield
• Based on company creditworthiness

By Interest Payment

1. Fixed Rate Bonds

• Constant coupon throughout tenure
• Most common type
• Predictable cash flows

2. Floating Rate Bonds

• Coupon linked to benchmark (MIBOR, T-Bill)
• Resets periodically
• Protection against rate changes

3. Zero Coupon Bonds

• No periodic interest
• Issued at discount, redeemed at par
• All return at maturity

By Conversion Features

1. Non-Convertible Debentures (NCDs)

• Pure debt, no equity conversion
• Fixed tenure and coupon
• Most common type

2. Convertible Debentures

• Can be converted to equity
• Conversion ratio specified
• Lower coupon than NCDs

3. Optionally Convertible

• Conversion at investor’s option
• Flexibility for investor

By Issuer Type

Credit Ratings

What Are Credit Ratings?

Assessment of issuer’s ability to repay debt obligations. Higher rating = lower default risk = lower yield.

Rating Agencies in India

Rating Scale

Long-Term Ratings:

Modifiers: + or - for finer distinction (AA+, AA, AA-)

Rating Distribution in India

Key Issue: Market dominated by AAA issuers; limited depth for lower ratings.

Bond Pricing and Yields

Price vs Yield Relationship

Inverse Relationship:

• When interest rates rise → Bond prices fall
• When interest rates fall → Bond prices rise

Why? If new bonds offer 10% and your bond pays 8%, your bond is less attractive. Its price must drop so buyer gets competitive yield.

Yield Calculations

1. Coupon Yield (Nominal Yield) $$Coupon\ Yield = \frac{Annual\ Coupon}{Face\ Value} \times 100$$

2. Current Yield $$Current\ Yield = \frac{Annual\ Coupon}{Market\ Price} \times 100$$

3. Yield to Maturity (YTM) Total return if held to maturity, including:

• Coupon payments
• Capital gain/loss (if bought at premium/discount)
• Reinvestment of coupons (assumed at YTM)

Example:

• Face Value: ₹100

• Coupon: 8%

• Market Price: ₹95

• Maturity: 3 years

• Coupon Yield: 8/100 = 8%

• Current Yield: 8/95 = 8.42%

• YTM: ~9.8% (includes capital gain of ₹5)

Spread Over G-Sec

Corporate bond yields = G-Sec yield + Credit Spread

Typical Spreads (over equivalent G-Sec):

Bond Risks

1. Credit Risk (Default Risk)

Risk: Issuer fails to pay interest or principal

Mitigation:

• Invest in high-rated bonds
• Diversify across issuers
• Monitor rating changes

2. Interest Rate Risk

Risk: Bond prices fall when rates rise

Measurement: Duration—longer duration = more price sensitivity

Mitigation:

• Match bond maturity to investment horizon
• Ladder bonds across maturities
• Consider floating rate bonds

3. Liquidity Risk

Risk: Unable to sell bond quickly at fair price

Issue in India: Corporate bond market is less liquid than G-Secs

Mitigation:

• Invest in frequently traded bonds
• Plan to hold to maturity
• Use bond mutual funds

4. Reinvestment Risk

Risk: Can’t reinvest coupons at same rate

When it matters: In falling rate environment

Mitigation:

• Zero coupon bonds (no reinvestment)
• Accept as part of bond investing

5. Call Risk

Risk: Issuer redeems bond early (call option)

When issuers call: When rates fall significantly

Mitigation:

• Check call provisions before investing
• Factor call risk into yield expectations

How to Invest in Corporate Bonds

Direct Investment

1. Primary Market (New Issues)

• Public issues (like NCD IPOs)
• Apply through broker
• Minimum: Typically ₹10,000

2. Secondary Market

• Buy listed bonds on exchanges (BSE, NSE)
• Requires demat and trading account
• Liquidity can be limited

Indirect Investment

1. Bond Mutual Funds

• Professional management
• Diversification
• Liquidity (open-ended)
• Various categories (short-term, corporate, credit risk)

2. Bond ETFs

• Traded on exchange
• Lower expense ratio
• Limited options in India

3. Debt PMS

• For HNIs (₹50 lakh minimum)
• Customized portfolios
• Direct bond ownership

Platform Options

Taxation of Bonds

Interest Income

Tax Treatment:

• Taxed as “Income from Other Sources”
• Added to total income
• Taxed at slab rate

TDS:

• 10% TDS if interest > ₹5,000/year
• Form 15G/15H for exemption (if eligible)

Capital Gains

Listed Bonds (on recognized exchange):

• Short-term (≤12 months): Slab rate
• Long-term (>12 months): 12.5% without indexation

Unlisted Bonds:

• Short-term (≤36 months): Slab rate
• Long-term (>36 months): 12.5% without indexation

Tax-Free Bonds

Select Infrastructure Bonds:

• Interest is tax-free
• Issued by PSUs (NHAI, REC, PFC, IRFC)
• Premium pricing due to tax benefit
• No new issuances (currently paused)

Indian Corporate Bond Market

Market Size

Key Issuers

Top Categories:

1. NBFCs (largest issuer category)
2. Banks
3. Public Sector Companies
4. Infrastructure companies
5. Private corporates

Recent Developments

1. Electronic Bidding Platform

• SEBI’s RFQ platform
• Improved price discovery
• Better transparency

2. Credit Default Swaps

• Introduced but limited adoption
• Risk transfer mechanism

3. Repo in Corporate Bonds

• Liquidity enhancement
• Triparty repo available

4. Retail Access

• Online platforms
• Lower minimums
• Growing awareness

Challenges

Bond Investment Strategy

For Conservative Investors

Focus: AAA and AA+ rated bonds Duration: Short to medium (1-5 years) Allocation: 60-80% of fixed income

For Moderate Risk Takers

Focus: AA and AA- rated bonds Duration: Medium term (3-7 years) Allocation: Mix of high and medium grade

Laddering Strategy

Concept: Spread investments across multiple maturities

Example Portfolio:

Benefit: Regular maturities, reinvestment flexibility, rate averaging

Key Takeaways

1. Bonds = Debt – You’re lending to the company
2. Coupon ≠ Yield – Market price affects actual return
3. Ratings matter – Higher rating = Lower yield = Lower risk
4. Price and yield inverse – Rates up = Prices down
5. Liquidity is an issue – Indian market improving but challenging
6. Tax at slab rate – Interest income added to income
7. Diversify – Don’t concentrate in single issuer

Disclaimer

This article is for educational purposes only. Bond investments carry credit and interest rate risks. Read offer documents carefully. Past returns don’t guarantee future performance. This is not investment advice.

Frequently Asked Questions

Q: Are corporate bonds safe? A: Depends on issuer’s credit quality. AAA-rated bonds are considered very safe. Lower-rated bonds carry higher default risk. Diversification helps manage risk.

Q: How do I check bond ratings? A: Rating agencies publish ratings on their websites. Also available on BSE/NSE for listed bonds and in offer documents for new issues.

Q: Corporate bonds vs FDs – which is better? A: Corporate bonds typically offer higher yields than FDs but carry more risk (credit, liquidity). FDs have deposit insurance up to ₹5 lakh. Consider credit quality and your risk appetite.

Q: What happens if the company defaults? A: Secured bondholders have claim on pledged assets. Unsecured bondholders rank below secured creditors. Recovery depends on company’s assets and legal process. Rating downgrades often precede defaults.

Q: Can I sell bonds before maturity? A: Yes, if listed. But liquidity can be an issue—you may not get your desired price. Unlisted bonds are harder to sell. Plan holding period accordingly.

Corporate bonds are the steady workhorses of the investment world—they won’t make you rich overnight, but they’ll provide regular income and capital preservation. Think of them as the dependable salary earner in your portfolio family, while equities are the entrepreneur with higher upside and risk.