Corporate Bonds in India: Types, Ratings, Risks, and How to Buy Them

What is a corporate bond?

A corporate bond is a debt instrument issued by a company to raise capital from investors in the public or private market. The investor lends a fixed amount (the face value) to the issuer in exchange for periodic interest payments (coupons) over a specified tenure, plus repayment of principal at maturity. The instrument is a contractual obligation of the company — the company must pay coupons and principal regardless of its profitability, and failure to pay constitutes a default that triggers legal recourse for bondholders.

Corporate bonds carry credit risk that sovereign bonds do not. When you lend to a company, you are exposed to the possibility that the company experiences financial distress and cannot honour its debt obligations. To compensate for this risk, corporate bonds offer yields that are higher than comparable-maturity Government Securities. The yield premium over G-Secs is called the credit spread, and it widens when investors perceive higher credit risk and narrows when confidence returns.

The Indian corporate bond market has expanded substantially since 2015, with annual primary issuance running into several lakh crores. However, retail participation remains relatively modest compared with developed markets. Most outstanding paper sits on the books of mutual funds, insurance companies, banks, and pension trusts.

Key terminology

• Face value (par value): the principal amount the issuer pays back at maturity, typically Rs 1,000 or Rs 10,000 per bond in the Indian market.
• Coupon rate: the fixed annual interest rate stated as a percentage of face value, typically paid in two equal semi-annual instalments.
• Maturity date: the date on which the issuer repays face value to bondholders.
• Accrued interest: the portion of the next coupon that has accumulated since the last payment date — relevant when buying or selling between coupon dates.
• Callable bonds: bonds the issuer can redeem early at a predetermined price. Beneficial to the issuer if rates fall, generally less attractive to investors.
• Putable bonds: bonds the investor can sell back to the issuer at a predetermined price before maturity. Beneficial to the investor.
• Convertible bonds: bonds that can be converted into a specified number of shares of the issuing company. Less common in India than in developed markets.
• Non-Convertible Debenture (NCD): the most common retail-accessible corporate bond format in India. NCDs cannot be converted into equity and pay only the contracted coupon and principal.
• Secured vs unsecured:secured bonds are backed by specific company assets pledged as collateral; unsecured bonds rank as general claims on the issuer's assets.

The four main types of corporate bonds in India

1. Non-Convertible Debentures (NCDs)

NCDs are the most common retail-accessible corporate bond format in India. They are issued through public issues — similar in process to an equity IPO — with a defined subscription window, application form, and listing on stock exchanges (NSE/BSE) after allotment. Issuers include NBFCs, housing finance companies, infrastructure companies, and select corporates.

A typical NCD public issue offers multiple series with different tenures (often 2, 3, 5, and 10 years) and different coupon structures (monthly, annual, cumulative). Coupon rates have historically ranged from 8% to 11% depending on the issuer's credit profile and prevailing rate environment. NCDs from well-rated NBFCs (Bajaj Finance, Mahindra Finance, Shriram Finance) have been popular among retail investors looking for fixed-income exposure beyond bank FDs.

After listing, NCDs trade in the secondary market on NSE and BSE, although liquidity is uneven — issues from large, well-known issuers trade more actively than smaller ones. Investors can buy listed NCDs through any broker, and post-listing prices reflect the prevailing yield environment and credit perception of the issuer.

2. Tax-free bonds

Tax-free bonds are debt instruments issued by select PSUs — historically NHAI, REC, IRFC, PFC, HUDCO, and IIFCL — under specific Government of India authorisation, with the explicit feature that the coupon income is exempt from income tax for the investor. Most tax-free bond issuance occurred between 2011-12 and 2015-16, when the Government allowed PSUs to raise infrastructure financing at concessional rates.

Although new tax-free bond issuance has been minimal since 2016, a substantial stock of these instruments remains outstanding and trades on stock exchanges. With coupons of 7.5% to 8.5% tax-free, these bonds have historically offered effective pre-tax equivalent yields of approximately 10-12% for investors in the 30% tax slab, making them highly attractive compared with bank FDs and many other fixed-income alternatives. The trade-off is the long remaining tenure (often 10-15 years) and the mark-to-market volatility if sold before maturity.

3. Perpetual bonds (AT1 bonds)

Additional Tier 1 (AT1) bonds are perpetual instruments issued primarily by Indian banks under Basel III capital regulations. They have no fixed maturity date, paying a coupon indefinitely (subject to the bank's discretion and regulatory permissions). They count as Tier 1 capital for the bank's regulatory capital adequacy.

AT1 bonds offer higher coupons than the bank's senior debt — typically 9% to 10.5% — but carry significant structural risk: in a stress scenario, the regulator can permanently write down the principal or convert the bonds into equity at a punitive ratio. The Yes Bank reconstruction in March 2020 wrote down approximately Rs 8,415 crore of AT1 bonds to zero, a watershed event for Indian retail investors. SEBI has since restricted AT1 bond sales to retail investors and mandated minimum investment thresholds and enhanced disclosure requirements.

Investors considering AT1 bonds must understand they sit at the bottom of the bank's creditor hierarchy and can absorb losses ahead of equity in distress scenarios — the higher coupon is compensation for genuine, non-trivial risk.

4. Masala bonds

Masala bonds are rupee-denominated bonds issued by Indian corporates to overseas investors in international markets, settled in foreign currency but with the rupee as the reference currency (so the issuer bears no foreign exchange risk). The format was launched by IFC in 2014 and gained traction with HDFC, NTPC, and other large issuers raising offshore funding through this route.

Masala bonds are primarily an institutional cross-border financing tool with limited direct retail relevance. Indian retail investors generally cannot purchase masala bonds directly, but the existence of this market serves as a benchmark for offshore rupee debt pricing.

Credit ratings: what each tier signals

Indian credit rating agencies — CRISIL, ICRA, CARE, India Ratings, and Brickwork — assign letter ratings that signal an issuer's relative credit quality and the historical default probability associated with each tier.

• AAA — highest safety. Reserved for top-tier corporates (Reliance, Tata Steel, HDFC Bank, ITC), select PSUs (NHAI, IRFC, REC), and the strongest NBFCs. Coupon yields historically in the 7.0%-8.0% range over recent years.
• AA+, AA, AA- — high safety. Strong corporates and NBFCs with established track records. Coupon yields historically 8.0%-9.0%.
• A+, A, A- — adequate safety. Investment grade but with noticeably higher credit risk. Coupon yields historically 9.0%-10.0%.
• BBB+, BBB, BBB- — moderate safety; the lowest investment-grade tier. Coupon yields historically 10.0%-11.0% with materially higher default probability than AAA.
• BB and below — sub-investment grade (speculative). Coupon yields can exceed 12% but default probability is materially higher. Generally not appropriate for retail capital preservation.

Ratings are relativeindicators within the assigning agency's methodology, not guarantees of repayment. Several major Indian credit events have shown that ratings can deteriorate rapidly — sometimes from investment grade to default within a single quarter. Investors should treat ratings as one input among many.

How to buy corporate bonds

Route 1: Public NCD issues

Similar to an equity IPO, a public NCD issue opens a subscription window (typically 5-10 working days) during which retail investors apply through their broker, online application portals, or physical forms. Allotment follows the issue close, and the bonds list on NSE/BSE within a few weeks. Public issues are advertised extensively and the prospectus contains detailed disclosures on financials, ratings, and use of proceeds.

Route 2: Stock exchange secondary market

Listed corporate bonds trade on the NSE and BSE corporate bond segments. Retail investors with a regular trading and demat account can place buy and sell orders for any listed bond identified by its ISIN. Liquidity varies — bonds from large, well-known issuers trade more actively, while smaller issues may have wider bid-ask spreads and lower volume. Brokers such as Zerodha, ICICI Direct, HDFC Securities, and Kotak Securities provide access to this segment.

Route 3: Online bond platforms (OBPPs)

SEBI introduced the Online Bond Platform Provider (OBPP) framework in 2022 to formalise the operation of online retail bond platforms (Wint Wealth, GoldenPi, IndiaBonds, BondsKart, and others). OBPPs aggregate listed bond offerings across the credit spectrum and provide retail-friendly interfaces with search, screening, and yield calculation tools. They have made the corporate bond market significantly more accessible to first-time fixed-income investors.

Tax treatment after Budget 2024

• Coupon income:taxable as Income from Other Sources at the investor's slab rate. Issuers deduct TDS at 10% on interest above the prescribed threshold (Rs 5,000 for most bonds).
• Capital gains on listed bonds: long-term capital gains apply to bonds held for more than 12 months, taxed at 12.5% (without indexation) post-Budget 2024. Short-term capital gains (12 months or less) are taxed at slab rate.
• Capital gains on unlisted bonds: the qualifying period for LTCG is 24 months. LTCG taxed at 12.5% without indexation; STCG at slab.
• Tax-free PSU bonds: coupon income is exempt from income tax under Section 10. Capital gains on sale follow the standard listed bond framework.

Risk types in corporate bonds

Credit (default) risk

The risk that the issuer fails to make a coupon payment or to repay principal at maturity. Credit risk varies enormously across rating tiers — historical 10-year cumulative default rates in India have run in the very low single digits for AAA paper but have risen sharply for sub-investment-grade tiers.

Interest rate risk

When market yields rise, the price of existing fixed-coupon bonds falls. Long-tenure bonds (10+ years) experience larger price swings than short-tenure bonds. Investors who hold to maturity are unaffected by interim price movements and continue to receive the contracted coupon and principal.

Liquidity risk

Smaller corporate bond issues may trade infrequently on the exchanges. If an investor needs to sell before maturity, the bid-ask spread can be wide, resulting in unfavourable execution prices. Investors should consider liquidity at the time of purchase, especially for lower-rated and smaller issues.

Call risk

For callable bonds, the issuer may redeem early in a falling-rate environment, forcing the investor to reinvest at lower prevailing yields. The bondholder loses the higher-coupon income they had locked in.

Major Indian credit events: lessons from history

IL&FS (September 2018)

Infrastructure Leasing & Financial Services (IL&FS), a large quasi-PSU NBFC with a complex group structure, defaulted on commercial paper and bond payments in September 2018. The group held investment-grade ratings until shortly before the default, which exposed weaknesses in rating agency models for opaque group structures. The default triggered a broader liquidity crisis in the NBFC sector and several debt mutual funds had to mark down NAVs sharply.

DHFL (June 2019 onwards)

Dewan Housing Finance Corporation Limited (DHFL), a major housing finance NBFC, missed coupon payments in June 2019, leading to rating downgrades and a freeze on its bonds. DHFL was rated AAA by certain agencies as recently as 2018. The eventual resolution under the Insolvency and Bankruptcy Code in 2021 produced recovery rates of approximately 35-45% for senior bondholders and substantially less for subordinate paper.

Yes Bank AT1 write-down (March 2020)

The RBI's reconstruction scheme for Yes Bank in March 2020 wrote down approximately Rs 8,415 crore of Additional Tier 1 perpetual bonds to zero. Many retail and HNI investors lost their entire principal. The case clarified the loss-absorption mechanics of AT1 instruments and led to enhanced regulatory disclosure requirements for these instruments.

Reliance Capital (2019-2022)

Reliance Capital Limited, the financial services arm of the Anil Ambani group, defaulted on debt obligations in 2019. The company entered the IBC resolution process in 2021. The eventual resolution in 2023-24 produced significantly impaired recoveries for bondholders. The case reinforced the importance of examining group-level leverage, not just standalone issuer metrics.

Corporate bonds vs alternatives

For retail investors building a fixed-income allocation, corporate bonds occupy a specific niche between Government Securities (zero credit risk, modest yield) and equity (highest expected return, highest volatility). They offer yield premium over G-Secs in exchange for credit risk, and yield premium over bank fixed deposits with the trade-off of mark-to-market volatility and the absence of DICGC insurance. Investors who want diversified credit exposure without selecting individual bonds may prefer debt mutual funds, particularly corporate bond funds and credit risk funds. Those comfortable with bond selection and willing to do the credit work can build direct portfolios. The choice between direct corporate bond holdings and sovereign G-Secs ultimately rests on the investor's tolerance for credit risk and willingness to monitor issuer health.

The bottom line

Corporate bonds are a meaningful component of a diversified fixed-income portfolio, offering yield premia of 100-400 basis points over comparable-tenure G-Secs across the rating spectrum. The key disciplines for retail investors are: anchoring on rating tiers and the historical default rates associated with each; understanding instrument structure (especially for AT1 perpetual bonds and other subordinated instruments); monitoring rating actions and outlook changes; and matching bond tenure to investment horizon. The credit events of 2018-2020 demonstrated that ratings are not guarantees and that the higher coupons of lower-rated and structured instruments are compensation for genuine risk that occasionally materialises.

Frequently asked questions

How are listed corporate bonds taxed in India after Budget 2024?

Coupon income is taxed at slab rate as Income from Other Sources. Capital gains on listed bonds held more than 12 months qualify for LTCG at 12.5% (without indexation). Short-term capital gains (12 months or less) are taxed at slab rate. Unlisted bond LTCG requires a 24-month holding period.

What happened with the Yes Bank AT1 perpetual bond write-down in 2020?

In March 2020, the RBI reconstruction scheme for Yes Bank wrote down approximately Rs 8,415 crore of AT1 perpetual bonds to zero. The case highlighted the loss-absorption nature of AT1 instruments and led to tighter retail-investor disclosure requirements.

What is the difference between an NCD and a fixed deposit?

An NCD is an exchange-listed corporate debt instrument that pays fixed coupons over a defined tenure but carries the issuer's credit risk and is not deposit-insured. A bank FD is a deposit covered by DICGC up to Rs 5 lakh and carries no credit risk within that limit. NCDs typically offer higher coupons, secondary market liquidity, and capital gains treatment if held over 12 months.

Are credit ratings reliable indicators of corporate bond safety?

Ratings are useful relative indicators but not guarantees. IL&FS, DHFL, and several AT1 issuances showed that ratings can deteriorate rapidly. Investors should treat ratings as one input alongside leverage, cash flow, sector exposure, and historical track record, and pay attention to rating actions and outlook changes.