Non-Convertible Debentures (NCDs) in India: How the Primary and Secondary Markets Work

What Are Non-Convertible Debentures (NCDs)?

Non-Convertible Debentures, commonly known as NCDs, are fixed-income debt instruments that companies issue to raise capital from the public. Unlike convertible debentures, NCDs cannot be converted into equity shares at any point during their tenure. Investors who hold NCDs remain creditors of the issuing company and receive periodic interest payments, with the principal repaid at maturity.

NCDs have become increasingly relevant in India's retail fixed-income landscape, particularly as NBFCs, infrastructure companies, and corporate entities use them to access public capital. For investors, understanding how NCDs move through both the primary and secondary markets is essential to evaluating their structure, liquidity, and risk profile accurately.

This article explains how NCDs are issued, traded, and taxed in India, drawing on SEBI regulations and market structure without providing investment advice or recommendations.

A Non-Convertible Debenture is a debt security issued by a company under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021. The term "non-convertible" refers to the fact that these instruments cannot be converted into the equity shares of the issuing company, distinguishing them from convertible debentures which carry that optionality.

Key structural characteristics of NCDs include:

• A defined maturity period, typically ranging from one to ten years

• A stated coupon rate (interest rate) paid at fixed intervals monthly, quarterly, half-yearly, or annually or cumulatively at maturity

• A face value, most commonly Rs. 1,000 per NCD in public issues

• A credit rating assigned by a SEBI-registered credit rating agency such as CRISIL, ICRA, CARE, or India Ratings

NCDs are issued primarily by corporates, NBFCs (Non-Banking Financial Companies), housing finance companies, and infrastructure entities. The regulatory framework ensures that only entities meeting minimum eligibility criteria including credit rating requirements can access the public NCD route.

For a broader understanding of how NCDs compare to bonds and debentures structurally, refer to Bonds vs Debentures vs NCDs: Complete Comparison.

Types of NCDs in India

Secured NCDs

Secured NCDs are backed by specific assets of the issuing company, such as receivables, property, or other tangible collateral. In the event of a default, secured NCD holders have a legal claim over the identified assets through the appointed Debenture Trustee. This structural protection places secured NCD holders higher in the repayment hierarchy relative to unsecured creditors, though recovery is not guaranteed and depends on asset value and insolvency proceedings.

Unsecured NCDs

Unsecured NCDs are not backed by any specific collateral. Repayment relies entirely on the issuer's creditworthiness and operational cash flows. Because the risk profile is higher, unsecured NCDs typically carry higher coupon rates to compensate investors. SEBI regulations require clear disclosure of whether an NCD is secured or unsecured in all offer documents and listing disclosures.

Fixed-Rate vs Floating-Rate NCDs

Most publicly issued NCDs carry a fixed coupon rate that remains unchanged throughout the tenure. A smaller category of NCDs carries a floating rate linked to a benchmark such as the RBI repo rate or T-bill yields. Fixed-rate NCDs provide income predictability, while floating-rate NCDs carry coupon adjustment risk depending on benchmark movement.

How the Primary Market Works for NCDs

What Is a Primary Market NCD Issue?

A primary market NCD issue also referred to as an NCD public issue or NCD IPO — is the process through which a company offers NCDs directly to investors for the first time. The issuer files a prospectus (or shelf prospectus) with SEBI and the stock exchanges, disclosing all material information including coupon structure, tenure, credit rating, use of proceeds, and risk factors.

Public NCD issues in India typically open for a defined subscription window of seven to thirty days. The minimum application amount for retail investors is generally set at Rs. 10,000, which equals ten NCDs at Rs. 1,000 face value each, or the minimum lot size specified in the offer document.

Who Can Apply?

SEBI categorises investors in public NCD issues into distinct categories, each with a defined allocation proportion:

• Category I: Institutional investors (banks, insurance companies, mutual funds, provident funds)

• Category II: Non-institutional investors (companies, trusts, societies, HUFs)

• Category III: High Net-Worth Individuals (HNIs) investing above a threshold amount

• Category IV: Retail Individual Investors (RIIs) with application amounts up to Rs. 10 lakh

Each category has a reserved allocation percentage as defined in the offer document. Oversubscription in one category does not automatically shift allocation to another unless the offer document provides for it.

NRIs can apply in some public NCD issues on a non-repatriable basis if the offer document specifically permits NRI participation.

How to Apply: ASBA and UPI Process

Applications for primary market NCD issues are made through the ASBA (Application Supported by Blocked Amount) mechanism or UPI (Unified Payments Interface) for retail investors — the same framework used for equity IPOs.

The process works as follows:

• Log in to a broker or bank portal that supports NCD applications

• Navigate to the NCD issues section and select the open issue

• Fill in the application details: series preference, quantity, and payment mode

• Funds are blocked in the investor's bank account (not debited) until allotment

• On allotment, the blocked amount is debited; on non-allotment or partial allotment, the blocked funds are released

Applications are processed through the stock exchanges, and allotment is done on a first-come-first-served (FCFS) basis for retail investors in most public issues, unlike equity IPOs which use a lottery mechanism when oversubscribed.

For a detailed explanation of the bond IPO process more broadly, refer to Bond IPOs and NCDs: How New Bond Issues Work.

Allotment and Listing Timeline

After the issue closes, the issuer processes allotments and lists the NCDs on the specified stock exchange — NSE, BSE, or both — typically within six working days of the issue closing date, as per SEBI timelines. Post-listing, the NCDs trade in the secondary market on the exchange's debt segment.

Investors receive an allotment confirmation and the NCDs are credited to their Demat account. From this point, the investor can hold until maturity or trade o

How the Secondary Market Works for NCDs

What Happens After an NCD Lists on NSE or BSE?

Once listed, NCDs enter the secondary market — the exchange-traded debt segment where existing holders can sell and new buyers can purchase NCDs at prevailing market prices. Unlike the primary market where the issuer receives the funds, secondary market transactions occur between investors. The issuing company is not a party to secondary market trades.

Secondary market NCD trading in India operates through the NSE's CBRICS (Capital Market, Bond, and Currency segment) or BSE's BOND platform, with settlement following T+1 rolling settlement — meaning trades settle the next working day.

How to Buy NCDs in the Secondary Market

To buy listed NCDs in the secondary market, an investor requires:

• An active Demat account with a registered depository (NSDL or CDSL)

• A trading account with a SEBI-registered stockbroker

• The process is structurally similar to buying equity shares on an exchange:

• Search for the NCD by its ISIN (International Securities Identification Number) or company name on the trading platform

• Check the available quantity, current market price, and last traded yield

• Place a buy order at market price or a limit price

On execution, the NCD units are credited to the Demat account on the settlement date

SEBI-registered Online Bond Platform Providers (OBPPs) such as BondScanner also facilitate access to listed NCDs through their platforms, providing standardised disclosures on coupon rate, credit rating, maturity date, and yield to maturity (YTM) in a structured format. For a guide on how to use BondScanner's tools to filter and evaluate bonds, refer to How to Use BondScanner Tools.

Price Discovery and Yield in Secondary Trading

In the secondary market, NCD prices are determined by supply and demand on the exchange. Unlike the primary market where the coupon rate is fixed at issue secondary market prices fluctuate based on:

• Prevailing interest rate environment: When market interest rates rise, existing NCD prices generally fall, as newer instruments offer relatively higher yields. The reverse is also true.

• Issuer credit profile: Any change in the issuer's credit rating or financial condition affects secondary market pricing.

• Residual tenure: As an NCD approaches maturity, its secondary market price typically converges toward face value, assuming no credit concerns.

• Market liquidity: Thin trading volumes in a particular NCD series can result in wider bid-ask spreads and price volatility.

The yield at which an NCD trades in the secondary market is commonly expressed as Yield to Maturity (YTM) — the annualised return an investor would earn if they purchased the NCD at the current market price and held it until maturity, accounting for all coupon payments and principal repayment. For a detailed explanation of YTM, refer to Yield to Maturity vs Yield to Call: Key Differences.

Liquidity Considerations

Secondary market liquidity for NCDs in India varies significantly across issuers and series. High-rated, large-issue NCDs from well-known NBFCs or infrastructure companies tend to have more active secondary trading. However, many NCD series — particularly those with smaller issue sizes or lower credit ratings — may have limited trading volumes on exchanges.

Investors considering secondary market exit before maturity should review historical trading data for the specific ISIN. In cases of thin liquidity, an investor may not be able to sell at the desired price, or may need to accept a significant price discount. This is a structural characteristic of India's debt market and should be factored into investmen

NCD Taxation in India (Post-July 2024 Rules)

Taxation on NCDs in India has two components: interest income tax and capital gains tax. The rules below reflect the changes introduced effective July 23, 2024 through the Finance (No. 2) Act, 2024.

• Interest Income: Coupon payments received from NCDs are taxable as "Income from Other Sources" at the investor's applicable income tax slab rate. There is no TDS (Tax Deducted at Source) on interest from listed NCDs held in Demat form, as per Section 193 of the Income Tax Act. However, investors must self-report this income in their ITR.

• Capital Gains on Sale Before Maturity (Listed NCDs): If a listed NCD is sold on a stock exchange before maturity, the gain or loss is treated as a capital gain:

• Short-Term Capital Gain (STCG): If the NCD is sold within 12 months of purchase, the gain is taxed at the investor's applicable slab rate

• Long-Term Capital Gain (LTCG): If the NCD is sold after 12 months of purchase, the gain is taxed at 12.5% without the benefit of indexation

This is a significant change from the pre-July 2024 regime, where listed bond LTCG was taxed at 10% without indexation. Investors should verify current tax rules with a qualified tax professional before making decisions.

For a comprehensive breakdown of bond taxation including LTCG, STCG, and reporting obligations, refer to Taxation on Bonds in India: Comprehensive Guide.

Risks Associated with NCD Investing

NCDs carry several risks that investors should understand before evaluating any instrument:

• Credit Risk: The issuer may default on coupon payments or principal repayment. This risk is higher for unsecured NCDs and lower-rated issuers. A credit rating downgrade during the tenure of the NCD can also affect its secondary market price.

• Interest Rate Risk: Rising market interest rates reduce the market price of existing NCDs. This affects investors who wish to exit before maturity, though it has no impact on those who hold to maturity and receive the contracted cash flows.

• Liquidity Risk: As noted above, secondary market liquidity for many NCD series is limited. Investors may not be able to exit at fair value before maturity.

• Reinvestment Risk: Coupon payments received periodically may need to be reinvested at prevailing rates, which may be lower than the original NCD coupon rate.

• Documentation Risk: Investors should read the offer document carefully before applying in the primary market. Key disclosures including use of proceeds, security details, repayment schedule, and risk factors are contained in the prospectus filed with SEBI.

For a broader overview of risks in bond investing, refer to Understanding Risks in Bond Investing.

Listed vs Unlisted NCDs: An Important Distinction

Not all NCDs in India are listed on stock exchanges. While publicly issued NCDs — those issued through the ASBA/UPI route to retail investors are mandatorily listed on NSE or BSE post-allotment, some NCDs are privately placed and remain unlisted.

Listed NCDs trade on exchange debt segments, have mandatory periodic disclosures through the exchange filing system, and are accessible via Demat accounts. They fall under SEBI's full regulatory oversight for listed securities.

Unlisted NCDs are placed privately, typically with institutional or HNI investors, and do not trade on exchanges. They carry limited post-issuance disclosure obligations and significantly lower liquidity. Retail investors do not typically have access to unlisted NCDs through SEBI-registered OBPPs.

SEBI's OBPP framework, under which BondScanner operates, provides access only to listed bonds and NCDs — ensuring that disclosures, ratings, and settlement mechanisms meet regulatory standards. Investors should verify the listing status of any NCD before proceeding.

FAQs

What is the full form of NCD?

NCD stands for Non-Convertible Debenture. It is a fixed-income debt instrument issued by companies that cannot be converted into equity shares.

What is the difference between NCD and bond?

Bonds and NCDs are structurally similar — both are debt instruments with fixed coupons and defined maturities. The term "bond" is broader and covers government, PSU, and corporate issuances. NCDs specifically refer to non-convertible corporate debentures and are governed under the Companies Act and SEBI's NCS Regulations.

Can NCDs be bought in the secondary market?

Yes. Listed NCDs can be purchased on NSE or BSE through a standard trading and Demat account, after the primary issue has closed and the instruments have listed on the exchange.

How is NCD interest taxed in India?

Interest income from NCDs is taxed as "Income from Other Sources" at the investor's applicable income tax slab rate. There is no TDS on listed NCDs held in Demat form.

What is the minimum investment in an NCD public issue?

The minimum investment is typically Rs. 10,000 for retail investors, equivalent to ten NCDs at Rs. 1,000 face value each, subject to the specific offer document.

What happens if I sell an NCD before maturity?

If a listed NCD is sold on an exchange before maturity, any gain is treated as a capital gain — taxed at slab rate if sold within 12 months, or at 12.5% if sold after 12 months (post-July 2024 rules).

Are NCDs safe?

The safety of an NCD depends on the issuer's financial strength and credit rating. Secured NCDs have asset backing, while unsecured NCDs rely entirely on the issuer's repayment capacity. All NCDs carry varying degrees of credit, liquidity, and interest rate risk.

What is the difference between applying in the primary market vs buying in the secondary market?

In the primary market, an investor applies directly during the issue window at face value using ASBA or UPI. In the secondary market, an investor buys from an existing holder at a market-determined price on NSE or BSE after the NCD has listed.