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What is a corporate bond in India and how does it differ from a bank FD
Corporate bonds in India: what they are, how they are priced, how credit ratings affect yield, and how they compare to bank FDs and government bonds for Indian retail investors.
In one line
A corporate bond is a debt instrument issued by a company to raise money from investors, paying a fixed coupon (interest rate) and returning the principal at maturity, with a yield determined by the company's credit rating, the tenure of the bond, and current market interest rates.
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How corporate bonds work
When a company needs to raise capital for expansion, working capital or debt refinancing, it can either borrow from a bank or issue bonds directly to investors. A bond has three key terms: the face value (usually Rs. 1,000 for retail bonds), the coupon rate (the annual interest as a percentage of face value), and the maturity date (when the principal is returned).
Corporate bonds trade on exchanges and the Bombay Stock Exchange's bond platform. The price of a bond in the secondary market moves inversely to interest rates: when market rates rise, existing bonds with lower coupons become less attractive, so their price falls. This price sensitivity is measured by 'duration': a bond with 5-year duration loses approximately 5 percent in price for every 1 percentage point rise in yield.
Retail investors can access corporate bonds directly through SEBI-regulated online bond platforms, through NCDs (non-convertible debentures) issued via public issues, and through debt mutual funds that hold diversified bond portfolios.
Credit ratings and the yield spread
Credit rating agencies CRISIL, ICRA, CARE, and India Ratings assess the likelihood that a bond issuer will repay its debt on time. Ratings range from AAA (highest safety) down through AA, A, BBB (investment grade) and below into speculative or 'junk' territory. The lower the rating, the higher the yield demanded by investors as compensation for credit risk.
The yield spread is the additional return a corporate bond offers over a comparable government bond (G-sec) of the same maturity. A AAA-rated corporate bond might yield 50 to 80 basis points more than a G-sec; a BBB-rated bond might yield 200 to 400 basis points more. This spread reflects credit risk, liquidity risk, and in some cases sector-specific concerns.
A credit event (a rating downgrade or default) can be catastrophic for bondholders. DHFL, IL&FS and Reliance Capital were examples of high-rated issuers that subsequently defaulted, wiping out bondholder capital. This is why credit due diligence is mandatory before buying individual bonds, and why most retail investors are better served by diversified debt mutual funds for corporate bond exposure.
Corporate bonds versus bank FDs
Bank fixed deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to Rs. 5 lakh per depositor per bank. Corporate bonds carry no such insurance: if the issuer defaults, recovery depends on the bondholder's seniority in the capital structure and the insolvency process under the IBC.
For the additional credit risk, corporate bonds generally offer 1 to 3 percentage points more yield than comparable bank FDs. Tax treatment is similar: both are fully taxable at the investor's income slab rate. However, listed bonds held for more than 12 months attract long-term capital gains tax at 12.5 percent on price appreciation, which can be advantageous compared to FD interest taxed at the marginal rate.
FAQ3 reader questions · AEO-eligible
Common questions on what is a corporate bond.
Are corporate bonds safe for retail investors in India?
Corporate bonds carry credit risk unlike bank FDs insured by DICGC. Safety depends on the issuer's creditworthiness and the bond's credit rating. AAA-rated bonds from large companies or PSUs are relatively safe; lower-rated bonds carry meaningful default risk. Retail investors without the capacity to analyse credit should prefer diversified debt mutual funds over individual bond purchases.
How are NCDs different from regular corporate bonds?
Non-Convertible Debentures (NCDs) are corporate bonds that cannot be converted into equity shares. In India, NCDs are the most common form of listed corporate bond. They are functionally identical to corporate bonds in terms of coupon, maturity and credit risk; the 'non-convertible' tag simply distinguishes them from convertible debentures which can be exchanged for shares.
How do I buy corporate bonds in India?
Corporate bonds can be bought through: (1) SEBI-regulated online bond platforms that aggregate listed NCD inventory, (2) primary issues of NCDs when companies raise fresh debt, (3) BSE's bond platform for secondary market trades, (4) debt mutual funds that hold diversified bond portfolios. Each route has different minimum investment sizes and liquidity profiles.
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