How to Evaluate Unlisted Bonds

What Are Unlisted Bonds?

In India’s growing fixed-income market, unlisted bonds have emerged as an alternative investment option for investors seeking steady returns outside traditional avenues. While these bonds can offer attractive yields, evaluating them requires a deeper understanding of their structure, risks, and regulatory aspects.

This article by BondScanner—a SEBI-registered Online Bond Platform Provider (OBPP)—provides an educational overview of how to evaluate unlisted bonds in India, their features, and how they differ from listed bonds.

Unlisted bonds are debt instruments that are not listed on stock exchanges such as the NSE or BSE. Unlike listed bonds, they are traded over-the-counter (OTC) or through private placements between institutions or accredited investors.

In simple terms, while listed bonds are publicly traded and offer liquidity, unlisted bonds are privately placed and can be less liquid but may come with higher yields to compensate for this risk.

Unlisted Bonds Example

For example, if a private company or an NBFC (Non-Banking Financial Company) issues bonds to raise funds but chooses not to list them on exchanges, those become unlisted bonds.

Some well-known issuers of unlisted bonds include:

• Large NBFCs such as Tata Capital Financial Services or L&T Finance (through private placements).

• Corporate groups raising capital for infrastructure, housing finance, or renewable energy projects.

These examples are purely illustrative and meant for educational purposes.

How to Evaluate Unlisted Bonds in India

Evaluating unlisted bonds involves analyzing several key factors that determine their creditworthiness, return potential, and risk profile.

1. Issuer’s Financial Strength

Begin with the issuer’s balance sheet, debt ratios, and cash flow statements. A financially sound issuer is better positioned to meet interest and principal obligations. Look at:

• Debt-to-equity ratio

• Interest coverage ratio

• Historical revenue stability

2. Credit Rating (if available)

Although not all unlisted bonds are rated, credit ratings (if provided by agencies like CRISIL, ICRA, or CARE) offer insights into the bond’s risk level.

• AAA or AA ratings indicate low credit risk.

• Lower-rated or unrated bonds may offer higher yields but carry more risk.

3. Coupon Rate and Yield to Maturity (YTM)

The coupon rate (fixed interest rate) and YTM (total return if held to maturity) are important for comparing bonds.

• A higher coupon may indicate greater risk exposure.

• Investors should assess whether the yield compensates for potential liquidity and credit risks.

4. Tenure and Maturity Profile

Unlisted bonds often come with fixed tenures ranging from 3 to 10 years. Evaluate whether the maturity timeline aligns with your financial goals and liquidity needs.

5. Covenants and Security

Some unlisted bonds are secured by company assets, while others are unsecured. Review:

• The nature of the security (if any).

• Covenants restricting the issuer’s borrowing or dividend payouts—these indicate investor protection measures.

6. Liquidity and Exit Options

Since unlisted bonds are not exchange-traded, liquidity can be limited. Check if:

• The issuer or arranger provides an early redemption option.

• Secondary sales are possible through platforms or institutional buyers.

7. Taxation on Unlisted Bonds

Tax implications differ for listed and unlisted bonds. Understanding taxation is crucial before investing.

Key points on unlisted bonds taxation:

• Interest income is taxed as per the investor’s applicable income tax slab.

• Capital gains on sale before maturity:

1. Short-term capital gains (STCG): If held for less than 36 months – taxed as per income slab.

2. Long-term capital gains (LTCG): If held for more than 36 months – taxed at 20% with indexation.

• TDS may be applicable on interest payments for resident investors.

8. Regulatory Compliance and Transparency

While unlisted bonds have fewer disclosure obligations than listed ones, ensure:

• The issuer complies with SEBI’s private placement guidelines.

• All transaction settlements occur through authorized clearing corporations, as facilitated by SEBI-registered OBPPs.

FAQs on Unlisted Bonds

1. What are unlisted bonds?

Unlisted bonds are debt instruments that are not listed on public exchanges like NSE or BSE and are traded privately.

2. How are unlisted bonds taxed?

Interest income is taxed as per your income slab. Capital gains are taxed at 20% with indexation if held for more than 36 months.

3. Are unlisted bonds safe?

Safety depends on the issuer’s creditworthiness and financial stability. Unlisted bonds carry higher risk compared to listed ones.

4. Can retail investors buy unlisted bonds?

Yes, but access is often limited. Investors can explore opportunities through SEBI-registered platforms.

5. How to evaluate unlisted bonds before investing?

Check the issuer’s financials, credit rating, coupon rate, security, and liquidity options before making any decision.

Conclusion

Evaluating unlisted bonds in India requires a careful approach that goes beyond yield comparisons. Investors should focus on credit quality, liquidity, and regulatory compliance before participating.

By using platforms like BondScanner, investors can explore both listed and unlisted bonds with transparent information and regulatory protection, helping them make well-informed decisions in the evolving Indian debt market.

Disclaimer

This blog is intended solely for educational and informational purposes. The bonds and securities mentioned herein are illustrative examples and should not be construed as investment advice or personal recommendations. BondScanner, as a SEBI-registered Online Bond Platform Provider (OBPP), does not provide personalized investment advice through this content.

Readers are advised to independently evaluate investment options and seek professional guidance before making financial decisions. Investments in bonds and other securities are subject to market risks, including the possible loss of principal. Please read all offer documents and risk disclosures carefully before investing.