In the traditional Indian investment landscape, “safe” has long been synonymous with gold and fixed deposits. However, as inflation gradually erodes real returns, investors are increasingly exploring alternatives that offer both stability and improved yield.

Fixed-income instruments provide a structured way to earn predictable returns with lower volatility than equities, while still allowing for varying risk-return profiles depending on the issuer and structure.

At AFINUE, the focus is on moving beyond conventional allocation, towards intelligently structured income strategies. This brings us to a fundamental question: are Non-Convertible Debentures (NCDs) merely corporate bonds, or do structural nuances significantly influence risk and return outcomes?

Bonds and debentures play a critical role in capital formation and corporate financing in emerging economies like India. They provide relatively stable income streams compared to equities to investors/ subscribers, while enabling governments and corporations to raise long-term capital.

 [1] (Government of India Economic Survey, 2024).

India’s bond market has expanded steadily, driven primarily by government borrowing alongside gradual growth in corporate debt.

• Government Securities (G-Secs): ₹105.9 trillion

• State Development Loans (SDLs): ₹59.27 trillion

• Corporate Bonds: ₹51.58 trillion

• Other Instruments: ~₹9.5 trillion

Despite this growth, corporate debt remains underdeveloped relative to global benchmarks, with policymakers such as NITI Aayog and the Ministry of Finance advocating for deeper bond market participation.[2]

Government Securities (G-Secs)

Issued by the central, state governments and now, even municipalities, these instruments finance fiscal expenditure and remain the most liquid segment of the market.

State Development Loans (SDLs)

State-issued bonds, auctioned via RBI, primarily fund infrastructure and development projects.

Corporate Bonds

Issued by companies to raise capital, these offer higher yields but carry credit risk linked to issuer strength.

Other Debt Instruments

Includes municipal bonds, infrastructure bonds, and other specialised securities.

• Tax-Free Bonds: Interest income is exempt from tax; typically issued by government-backed entities

• Municipal Bonds: Used by urban local bodies to fund public infrastructure

• Sovereign Green Bonds: Financing environmentally sustainable projects

• Sovereign Gold Bonds: Government-issued instruments linked to gold prices, offering fixed interest with capital gains exemption on redemption for individuals

In India, the terms bonds, corporate bonds, and debentures are often used interchangeably, but there are subtle distinctions in structure and usage.

A bond is a fixed-income instrument through which investors lend money to an issuer, typically a government, PSU, or corporation.

Government bonds, in particular, are backed by sovereign credit, making them among the lowest-risk instruments in the domestic market. While not secured by specific assets, they derive strength from the government’s repayment capacity.

Key Features

• Fixed or floating coupon payments

• Defined maturity period

• Tradable in secondary markets (stock exchanges)

• Lower credit risk (for sovereign/high-rated issuers)

These are corporate debt instruments issued by entities such as NBFCs, infrastructure companies, real estate developers and financial institutions to raise capital.

Among retail investors, such instruments have gained popularity due to their relatively higher yields compared to traditional options like bank or post office fixed deposits and government bonds. Increased accessibility via digital platforms and regulatory improvements has further accelerated participation.

From a functional standpoint, these debentures are widely used for:

• Lending operations (especially by NBFCs)

• Business expansion

• Debt refinancing

• Infrastructure of construction financing

For investors, the key distinction is this: while all NCDs fall under corporate debt, not all corporate bonds are structured as NCDs.[3]

1. Secured NCDs

• Backed by tangible or financial assets, like real estate

• Trustees have legal rights over pledged collateral

• Lower risk within the NCD universe

2. Unsecured NCDs

• No asset charge

• Higher yield to compensate for increased risk

• Greater dependence on issuer creditworthiness

3. Listed NCDs

• Traded on stock exchanges such as NSE and BSE.

4. Unlisted NCDs

• Available only through private placements and lack liquidity, as they are not traded on stock exchanges. 

• These often carry a higher risk due to limited liquidity and transparency.

Academic research on corporate financing highlights that firms issuing debentures or corporate bonds typically offer higher yields to compensate investors for default risk and lower market liquidity. [4][5][6]

The biggest risk in NCDs or Corporate Bonds, whether secured or unsecured, is that if the issuing company faces financial trouble, interest and/or principal payments may stop.

Examples in India:

• IL&FS crisis

• DHFL default

• Yes Bank AT1 Bonds

Such events exposed weaknesses in the corporate debt market. This is why issuer quality and security structure matter as much as coupon rate. 

Bond prices move opposite to interest rates.

If interest rates rise:

• Bond prices fall

• Investors may face capital loss in secondary markets.

Some NCDs have low trading volume. You may struggle to sell them before maturity.

If inflation outpaces bond yields, real returns can turn negative, a key risk associated with Government Bonds, which typically offer lower coupon rates. 

The above bond yields, real returns become negative. Taxation of Bonds and NCDs in India

Following the Finance Act 2023, the earlier exemption that prevented Tax Deducted at Source (TDS) on interest from listed debentures held in dematerialised form was removed. As a result, interest earned on many corporate bonds and NCDs may now attract TDS under Section 193 of the Income Tax Act, typically at 10% subject to applicable thresholds. This tax provision effectively reduces the IRR on these investments.[7]

A 10-year Government Bond in India currently yields around 6.5 – 7%, while higher-yielding corporate NCDs issued by NBFCs or mid-tier corporates may offer roughly 9–11%, reflecting the additional credit risk investors assume.[8]

Regulation and Credit Ratings

Government securities are managed by the RBI, while corporate bonds and NCDs fall under SEBI and the Companies Act.

Credit ratings from agencies like CRISIL, ICRA, and CARE provide a benchmark of issuer safety, but are not static.

Example:
DHFL was once rated AAA before defaulting, highlighting the need for continuous monitoring.

[9]

Regulatory Oversight under SEBI and the Companies Act

Under SEBI’s Non-Convertible Securities Regulations (2026), issuers need to comply with

• Mandatory disclosures

• Appointment of debenture trustees

• Security cover requirements for secured instruments

• Ongoing reporting obligations

These measures enhance transparency and improve investor protection.

The Role of Credit Rating Agencies

Credit ratings play a critical role in corporate debt investing, as they help assess the issuer’s ability to meet its obligations. Instruments are typically rated by agencies such as CRISIL, ICRA, and CARE, with ratings ranging from AAA (highest safety) to D (default).

• AAA/AA: High safety, lower interest rates.

• A/BBB: Moderate safety, higher interest rates.

However, ratings are not static. Downgrades can significantly impact market value even without a default, which is why investors must track rating changes over time

[10](RBI; [11]SEBI NCS Regulations 2021; [12]Companies Act 2013)

The issuance and listing of Non-Convertible Debentures (NCDs) in India are governed by the regulatory framework established by the Securities and Exchange Board of India, primarily under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, along with subsequent SEBI master circulars and listing disclosure requirements.

These regulations require issuers to provide comprehensive disclosures regarding financial statements, credit ratings, risk factors, security structure, and the intended use of proceeds before issuing NCDs. Issuers must appoint a debenture trustee to safeguard investor interests and ensure compliance with the debenture trust deed.

For secured NCDs, even if they are unlisted, companies are required to create a charge over specified assets in favour of the trustee and maintain adequate security cover. Additionally, issuers must comply with periodic reporting and disclosure obligations after listing, including updates on financial performance, credit rating changes, and security cover certifications.

Together, these regulatory requirements enhance transparency, strengthen investor protection, and promote accountability in India’s corporate debt market.[13]

The Yes Bank AT-1 bond crisis of 2020 is one of the most important examples of corporate debt risk in India. It highlighted how certain debt instruments can behave very differently from traditional bonds during financial stress.[14]

Background

Founded in 2004, Yes Bank grew rapidly by lending to large corporate and infrastructure projects. To strengthen its capital base under Basel III norms, the bank issued Additional Tier-1 (AT-1) bonds, which offered higher interest rates than bank deposits and many traditional bonds.

These instruments attracted HNIs, institutions, and retail investors seeking higher yields.

What Makes AT-1 Bonds Different

AT-1 bonds are perpetual capital instruments designed to strengthen a bank’s capital structure. Key characteristics include:

• No fixed maturity date

• Higher coupon rates

• Counted as Tier-1 capital under Basel III

• Can be converted to equity or written down during financial stress

Unlike conventional bonds, AT-1 instruments are loss-absorbing, meaning investors carry significantly higher risk.

The Crisis and Write-Off

By 2018–2019, Yes Bank faced rising NPAs, exposure to stressed borrowers, and declining investor confidence.

In March 2020, the Reserve Bank of India placed the bank under a moratorium and implemented a restructuring plan.

As part of this process, ₹8,415 crore of Yes Bank AT-1 bonds were written down to zero, meaning bondholders lost 100% of their investment, while shareholders retained some value after restructuring.

This outcome surprised many investors because bondholders typically rank above equity holders. However, AT-1 bonds are specifically designed under Basel III to absorb losses before other creditors when a bank’s capital falls below regulatory thresholds.

Key Investor Lessons

• Not all bonds carry the same risk.

• Higher yield usually means higher risk.

• Investors must review the prospectus and loss-absorption clauses carefully.

• Diversification across issuers and instruments is critical.

For NCD investors, the case reinforces the need to evaluate credit ratings, issuer financial health, and security structure before investing in corporate debt.

To sum up,

The question isn't whether you should choose Bonds over NCDs. A sophisticated portfolio usually has room for both. Bonds provide the "ballast", the heavy weight that keeps the ship steady during a storm. NCDs provide the "sails", the engine that captures the wind of higher yields from debt investments to move your wealth forward.’

As you look to diversify your holdings, traditional fixed deposits may not always deliver adequate real returns in an inflationary environment. Look at the structured world of Bonds and NCDs, or even better, “structured private credit”, with different risk-rewards. 

At AFINUE, we are committed to providing research-driven insights that help investors make informed decisions. From Real Estate Financing through NCDs, to Fractional Ownership opportunities is yield generating assets and financing through private credit, our analysis is designed to empower you to build wealth while supporting your lifestyle, your future, and the planet.

Also Read: What is Private Credit? History, Growth, Risks & Returns

 [1] (Government of India Economic Survey, 2024). 

[2] Jiraff: Indian Bond Market 2025

[3] Economics Times: The rising impact of retail investors on debt capital markets

[4] Bond Market Strategy: How to Profit from RBI Rate Cuts

[5]Reuters: India bond traders seek buybacks as yields climb despite switch

[6] Oxford Academic: Quantifying Liquidity and Default Risks of Corporate Bonds over the Business Cycle 

[7]  TaxGuru: Exemption from TDS on payment of interest on listed debentures to a resident removed.

[8] Investing.com: India 10-Year Bond Yield 

[9] Brick work ratings:  Dewan-Housing-Finance-NCD_500Cr

[10] RBI: Government Securities Market in India – A Primer

[11]SEBI NCS Regulations 2021; 

[12]Companies Act 2013

[13] Master Circular for listing obligations and disclosure requirements for Non-convertible Securities, Securitized Debt Instruments and/ or Commercial Paper

[14] The Indian Express: Rs 8,415 cr  worth  of Yes Bank‘s AT-1  bond written down