Corporate Bond
A Corporate Bond is a debt security issued by a private or public sector company to raise capital from investors, carrying a stated coupon rate and maturity date. In India, corporate bonds are regulated by SEBI and traded on recognised stock exchanges as well as the RBI's Negotiated Dealing System-Order Matching (NDS-OM) platform.
Corporate bonds are one of the primary instruments through which Indian companies access long-term debt capital from the market. When a company like Reliance Industries, HDFC Ltd, or Tata Sons issued bonds, it was essentially borrowing from institutional and retail investors at a predetermined interest rate (the coupon), promising to return the principal at maturity. The bond may carry a fixed coupon — say, 7.5% per annum paid semi-annually — or a floating coupon linked to a benchmark like the Mumbai Interbank Offer Rate (MIBOR) or the 91-day Treasury Bill rate.
The Indian corporate bond market has historically been dominated by AAA-rated issuers — primarily financial institutions like housing finance companies, NBFCs, and public sector undertakings — because the investor base (predominantly insurance companies, provident funds, and mutual funds) has strong mandates for high-grade paper. The credit spread — the extra yield a corporate bond offers over a comparable government security — reflects the issuer's credit risk. SEBI and the RBI have made sustained efforts to deepen the corporate bond market, including introducing the Electronic Bid Submission (EBS) system, simplifying listing requirements, and allowing FPIs to invest in Indian corporate bonds under the Voluntary Retention Route.
The 2018 IL&FS default was a seminal event for the Indian corporate bond market. Infrastructure Leasing & Financial Services, rated AAA until shortly before its collapse, defaulted on multiple debt obligations, triggering a sharp reassessment of credit risk in the NBFC and infrastructure sectors. Mutual funds holding IL&FS paper saw their NAVs drop sharply, and credit risk funds that had concentrated in high-yield paper faced massive redemption pressure. The episode underscored the danger of over-reliance on credit ratings and the need for independent credit analysis.
For retail investors, corporate bonds can be accessed through bond platforms, stock exchanges (BSE and NSE have separate bond platforms), and debt mutual funds. Direct investment requires a demat account and a minimum investment that can range from Rs 1,000 to Rs 10 lakh depending on the issuer and issuance structure. Tax treatment differs from equity: interest income from corporate bonds is taxed as per the investor's slab rate, and capital gains on bonds sold before maturity attract applicable rates. For those seeking regular income at better-than-FD yields, corporate bonds from highly rated issuers offered a compelling option in the post-demonetisation rate environment.