Introduction to Corporate Debt Market

The corporate debt market comprises securities issued by companies to raise long‑term funds. These instruments are debt‑based, meaning the issuer promises to pay periodic interest (coupon) and repay the principal at maturity.

In India, corporate debt accounts for a substantial share of the total bond market, providing an alternative to bank financing and supporting infrastructure and expansion projects. The market is regulated by SEBI, which ensures transparency, fair pricing, and investor protection.

For the NISM exam, candidates must recognise the market’s purpose, its regulatory oversight, and how it fits alongside government securities and money‑market instruments. Typical questions ask you to classify a security, identify the governing regulator, or compute a simple yield.

• Regulator: SEBI (Securities and Exchange Board of India)
• Key function: Channel corporate funds from investors to issuers

Companies issue a variety of debt securities, each with distinct features. The most common are corporate bonds, debentures (convertible and non‑convertible), and commercial paper.

Corporate bonds typically have longer maturities (5‑10 years or more) and fixed coupon rates. Debentures may be listed or unlisted and can be convertible into equity, offering investors an added upside. Commercial paper is a short‑term instrument (up to 364 days) issued at a discount and used for working‑capital needs.

Exam questions frequently ask you to match an instrument with its maturity range, interest payment style, or listing requirement. Remember that "debenture" in India often implies an unsecured instrument, whereas a "bond" may be secured or unsecured.

• Bond – Fixed‑coupon, usually listed, longer maturity.
• Non‑Convertible Debenture (NCD) – Fixed‑coupon, can be listed, no conversion right.
• Convertible Debenture – Fixed‑coupon, convertible into equity at a pre‑specified price.
• Commercial Paper – Discounted, short‑term, unlisted.

Before a corporate debt security can be offered to the public, the issuer must file a Draft Offer Document (DOD) with SEBI, obtain a credit rating from a recognized agency, and comply with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

If the security is to be listed, the issuer must also satisfy the listing requirements of the relevant stock exchange, including minimum issue size and post‑issue disclosure obligations. Unlisted securities follow a private placement route, but still require SEBI approval and adherence to disclosure norms.

For the exam, remember the two‑step approval: SEBI clearance followed by exchange listing (if applicable). Questions may present a scenario and ask whether SEBI registration is mandatory, or which document must be filed first.

The market price of a corporate debt security reflects the present value of its future cash flows (coupons and principal) discounted at the prevailing market yield. When a bond trades at a price above its face value, it is said to be at a premium; below face value indicates a discount.

Yield measures the investor’s return. The simplest yield measure for exam purposes is the Current Yield, which relates the annual coupon to the current market price. More advanced concepts like Yield to Maturity (YTM) are rarely required for Level‑1 certification.

Exam candidates should be able to compute Current Yield quickly and recognise that it does not account for capital gains or losses arising from price differences at maturity.

Credit rating agencies assign ratings (e.g., AAA, AA, A, BBB, etc.) to corporate debt based on the issuer’s creditworthiness. A higher rating indicates lower default risk and typically results in a lower coupon rate.

In India, SEBI mandates that every public issue of corporate debt must be rated by at least one SEBI‑registered rating agency. The rating influences investor demand, pricing, and the required yield premium over risk‑free rates.

Exam questions may present a rating and ask you to infer the relative risk level or expected coupon range. Remember the hierarchy: AAA is the safest, followed by AA, A, BBB (investment grade), then BB and below (speculative grade).

Key participants include issuers (corporates), investors (retail, high‑net‑worth individuals, mutual funds, insurance companies), and intermediaries (investment banks, brokers, depositories). Each plays a distinct role in pricing, distribution, and settlement.

Investment advisers must understand the risk appetite of each investor class. For example, mutual funds often prefer higher‑rated, listed bonds for liquidity, while HNIs may allocate to higher‑yielding unlisted NCDs.

Typical exam scenarios describe a client profile and ask which corporate debt instrument best matches the client’s investment horizon and risk tolerance.

Interest earned on corporate bonds and debentures is taxable as "Income from Other Sources" for resident individuals. The payer deducts Tax Deducted at Source (TDS) at 10% if the interest exceeds Rs 5,000 in a financial year, unless the investor submits Form 15G/15H.

Capital gains arising from the sale of listed corporate bonds are taxed as short‑term or long‑term capital gains depending on the holding period (≤12 months = short‑term, >12 months = long‑term). Short‑term gains are added to the individual's taxable income, while long‑term gains attract 10% tax without indexation.

Unlisted debt securities are treated as capital assets; gains on their transfer are taxed as capital gains, but the holding period rule follows the same 12‑month threshold. Exam questions often test the distinction between interest taxation and capital‑gain taxation.