Corporate bonds are one of the most sought-after ways to raise capital in the Indian financial market. Along with providing companies with an alternate source of financing, it also serves as an avenue for fixed-income securities for investors.
In today’s article, we take a deep dive into the world of corporate bonds in India, what it means, and briefly explain the significance, types, and components of a bond issued in India.
What Are Corporate Bonds?
Corporate bonds are debt instruments that are issued by businesses for a specific period, and with fixed interest rates. They are vastly different than shares, when we own shares of a company, there is also a transfer of ownership rights while owning corporate bonds doesn’t mean owning equity in a company.
The company pays the investors predetermined interest on the principal which is our profit. Whether the company is in high profits or extreme loss, it is obliged to pay its investors interest and principal to the bondholders.
Significance of Corporate Bonds
Corporate bonds offer a range of benefits for investors, a few of them are:
- Regular Income
If you are an investor who is looking for an investment that generates regular income for you, corporate bonds would be the right option for you. One of the most attractive significance of corporate bonds is that it offers regular income for an investor through interest payment.
- Portfolio Diversification
A golden rule every investor goes by is to never put all the eggs in one basket, corporate bonds are essential if you want to maintain a well-diversified investment portfolio. As the performance of corporate bonds isn’t related to shares or other bonds, by investing in corporate bonds, an investor can efficiently manage risks.
- Corporate Finance
Corporations can utilize corporate bonds to raise capital for the business. Unlike shares, corporate bonds don’t insinuate a transfer of ownership to the shareholders. So, a company can raise capital, and maintain the ownership of the business.
- Relative Safety
When compared to equities, high-rated corporate bonds are generally considered a safer investment opportunity. To avoid high risk, an investor has the choice to invest based on the risk tolerance an investment offers.
Types of Corporate Bonds in India
Here are some common types of corporate bonds found in India:
- Secured and Unsecured Bonds
Secure bonds are bonds that are backed by an additional asset, providing an extra layer of security to the bondholder. Unsecured bonds on the other hand aren’t backed by an asset, and their performance is solely based on the worthiness of the issuer.
- Convertible Bond
Convertible bonds are those that provide the bondholder the option to convert the bond into a predetermined number of equity shares. The bondholder can also opt to receive the principal amount if they choose.
- Non-Convertible Bonds
Non-convertible bonds are the opposite of convertible bonds, the bondholder cannot convert it into debentures or shares. They are fixed money instruments for specific terms and interest rates
Bonds Format in India
The design for corporate bonds in India generally includes the following components:
- Provider Info: This part provides details on the company that is issuing bonds, like its name, and address along with the corporate identification code (CIN).
- Bond Type: Identifies the bond’s security by a convertible, unsecured, or not convertible.
- Interest Rate: Indicates how much coupon interest is charged, which is the annual interest rate that is paid to bondholders.
- Maturity Date: Identifies the date when the bond matures and the issuer will pay all principal amounts to holders of bonds.
- Face Value: This is the nominal value or Par value. It is the amount that will be paid to bondholders upon maturity.
- Credit Rating: Represents the creditworthiness of the issuer given by credit rating agencies like CRISIL, ICRA, or CARE.
- The Coupon Payment Calendar: outlines the dates and frequency of the interest payment to bondholders.
- Option for Calls and Puts: Defines any put or call options that permit the issuer and bondholders to purchase the bonds before expiration.
Conclusion
The corporate bonds in India provide investors with a chance to broaden their investment portfolios, generate fixed income, and aid in the growth of businesses. Knowing the structure of bonds is vital to making educated choices in the ever-changing market of bonds for corporations.
Corporate bonds provide both investors and issuers with many benefits. For investors, it is a great source of regular income and the perfect contender for portfolio diversification. The issuer can raise capital by issuing corporate bonds without there being any change in the ownership rights.
