Corporate Bonds and Debentures: Chasing Yield With Your Eyes Open

Investing in India

A company that needs money can borrow from banks, or issue bonds/debentures — tradeable IOUs promising a fixed coupon (say 9% a year) and repayment of face value on a maturity date. In India the retail-relevant instrument is usually the NCD — non-convertible debenture, meaning it stays a loan and never converts to shares.

The Distinctions That Matter

Secured vs unsecured, coupon vs YTM

Secured vs unsecured: secured NCDs are backed by specific company assets, giving bondholders a claim if things go wrong; unsecured NCDs rank as ordinary creditors and pay a bit more for it. “Secured” improves recovery prospects in a default — it does not prevent the default, nor guarantee full recovery.

Senior vs subordinated: subordinated paper stands behind other creditors in a wind-down. Yes Bank’s AT1 bondholders — many of them retail — were written down to zero in 2020. If a bond pays notably more than the same issuer’s other bonds, the fine print is where the reason lives.

Coupon vs YTM: the coupon is fixed; the price you pay in the secondary market usually isn’t par. Yield to maturity — your actual annualised return at your purchase price, held to maturity — is the only number to compare bonds on. Every serious platform displays it.

Credit Ratings

Useful, fallible — and occasionally spectacularly late

Rating agencies (CRISIL, ICRA, CARE, India Ratings) grade issuers’ ability to pay:

Rating band	Read as	Indicative yield over G-secs
AAA	Highest safety — top corporates, PSU-backed issuers	~0.3–0.8%
AA+ / AA / AA–	High safety, marginally weaker	~0.6–1.5%
A band	Adequate now; more sensitive to bad times	~1.5–3%
BBB band	Lowest “investment grade”	~3%+
Below BBB–	Speculative — not retail territory	Wide

Two truths to hold simultaneously. Ratings are useful: default rates rise steeply as you descend the scale, and the ordering is broadly reliable. Ratings are fallible: IL&FS was rated AAA weeks before it defaulted in 2018; DHFL’s paper carried high ratings not long before its 2019 collapse froze crores of retail money in a years-long resolution. A rating is a considered opinion that is usually right and occasionally, spectacularly, late.

The other lesson from those episodes: in a default you don’t simply “lose some interest.” Your money enters insolvency resolution — years of waiting for a recovery that might be 40 paise on the rupee. Corporate bonds have FD-like packaging and equity-like tail risk on a bad name. Price them accordingly.

Three Ways To Buy

Public issues, secondary market, and OBPPs

1. Public NCD issues

Companies (heavily NBFCs) periodically run public issues — advertised openly, applied to like an IPO via your demat account, typically ₹10,000 minimum, listing on the exchanges afterwards. You get issue-price entry and a prospectus that actually discloses the risk factors. Read at minimum: the rating and its outlook, secured/unsecured status, the issuer’s leverage, and what the money is for.

2. The secondary market

Listed NCDs and bonds trade on NSE/BSE and sit in your existing demat like shares. Liquidity is the catch — many listed bonds barely trade, spreads can be wide, and a market sell order into a thin book is how people donate 2% to strangers. Limit orders only.

3. Online Bond Platform Providers (OBPPs)

The newest route: SEBI brought bond-selling websites under regulation in 2022 as OBPPs, and cut the minimum face value of privately placed bonds from ₹1 lakh to ₹10,000 in 2024 — opening institutional paper to retail wallets. Platforms display curated bonds with YTMs, ratings, and one-click purchase into your demat.

A distribution-truth note: OBPPs and bond distributors earn from spreads or placement fees — the yield you’re shown is net of someone’s margin, and inventory on display is inventory someone wants to sell. Regulated ≠ curated in your interest. Compare the YTM against a same-rated, same-tenor alternative before assuming the shiny 10.5% is a bargain; unusually high yield for the stated rating is a question, not a gift.

Taxation

What you actually keep after tax

Coupon interest is taxed at slab rate as income from other sources — same as FD interest. TDS at 10% generally applies on listed bond interest above ₹10,000 a year (a post-2023 change many holders discover at AIS-matching time). Capital gains on listed bonds held over 12 months are long-term at 12.5% without indexation; 12 months or less at slab. This creates a genuine niche: bonds bought at a discount and held long-term convert part of the return into 12.5%-taxed gains rather than slab-taxed interest.

Post-tax reality check for the 30% bracket: a 9% AA NCD nets ~6.2% if all return is coupon — against ~4.8% from a 7% FD. That ~1.4% is the true, honest reward on offer for taking AA credit risk. Decide if it’s worth it at that number, not at the headline 9%.

The Risk Discipline

Rules worth carving somewhere visible

• Cap the category. Corporate bonds as a slice of fixed income — a common conservative framing is 10–20% of your debt allocation — never as the whole of it, and never overlapping with your emergency fund.
• Cap per issuer. No single company’s paper should be big enough that its default changes your life. If you can’t diversify across 5+ issuers at your ticket size, a corporate bond fund is structurally the better vehicle — one default in a 60-bond portfolio is a bad month, not a catastrophe.
• Stay high. AAA/AA for money that matters. The A-and-below aisle is professional territory where the extra 2% exists precisely because some of those issuers won’t pay.
• Ladder maturities and avoid very long corporate paper — credit visibility beyond 5–7 years is poor even for good analysts.
• Red flags from live cases: unrated or “provisionally rated” paper sold on relationships; yields 3%+ above same-rated peers; issuers whose business is lending to risky borrowers offering you their risk at retail; “guaranteed” anywhere in a corporate bond pitch; and pressure to decide inside a “closing soon” window.

Corporate FDs vs corporate bonds: company fixed deposits are the unlisted cousins — simpler, often bank-like in interface, no DICGC cover, no liquidity, no security. A listed, secured NCD from the same issuer is usually the structurally better instrument at a similar yield: tradeable, transparent, and ahead in the queue. The main honest argument for the corporate FD is simplicity.

Key Takeaways

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Frequently Asked Questions

Your questions answered

Are corporate bonds safe if they’re “secured”?

Safer in recovery, not safe from default. Security means bondholders have a claim on specified assets if the issuer fails — the realisation of that claim still runs through a resolution process that takes years and rarely returns 100%. Treat “secured” as a seatbelt, not a force field.

What’s a realistic allocation to corporate bonds for a regular investor?

The conservative convention: a minority slice of your debt allocation (not your whole portfolio), spread across at least a handful of AAA/AA issuers, sized so a single default is an annoyance. If that maths doesn’t work at your ticket size, a corporate bond mutual fund achieves the diversification for you. Our Mutual Funds guide covers debt fund categories in detail.

Bond or bond fund — how do I choose?

Direct bonds give a known YTM to a known date — ideal for maturity-matching — but demand issuer homework and enough capital to diversify. Bond funds give instant diversification and liquidity, but a fluctuating NAV and slab taxation on gains post-2023. Small ticket or no time for credit work → fund. Specific date, larger corpus, willingness to research → direct paper has a real place.

Why does an NCD from a well-known brand pay 10% when its FD pays 8%?

Often it’s a different entity (the group’s riskier lending arm), a subordinated tranche, or longer/less liquid paper. Brand familiarity is doing the selling; the structure is doing the risking. The prospectus — specifically the rating, seniority, and issuer financials — answers the question the advertisement won’t.

What actually happens if my bond defaults?

The issuer typically enters resolution (IBC or otherwise); the debenture trustee represents holders; payments freeze; and after a process measured in years, you receive a recovery that history suggests may be anywhere from near-zero to most of your principal. This — not a late coupon — is the downside case, and it’s why position sizing is the entire game.

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