Unlisted Bonds: A Comprehensive Guide to Understanding Their Role in India’s Debt Market

What Are Unlisted Bonds?

Unlisted bonds are debt securities that are not listed or traded on any recognized stock exchange such as NSE or BSE. These bonds are issued by companies to raise funds but are sold directly to investors, institutions, or through private placements rather than being made available for public trading.

In simple terms, unlisted bonds operate outside the exchange ecosystem. While listed bonds are traded transparently through recognized exchanges, unlisted bonds are held and transferred privately between parties.

Example:

Suppose a mid-sized renewable energy company issues bonds worth ₹100 crore to finance its upcoming projects but doesn’t list them on an exchange. These would be categorized as unlisted bonds, as investors purchase them directly from the issuer or via intermediaries, without exchange-based trading.

Unlisted Bonds in India: An Overview

In India, unlisted bonds have gained traction among institutional investors, family offices, and high-net-worth individuals (HNIs) seeking fixed-income options beyond traditional listed instruments.

They are typically issued by private companies, infrastructure firms, or NBFCs through private placements under SEBI and Companies Act regulations. These issuances are governed by strict compliance norms, but since they are not exchange-listed, liquidity and price discovery may be limited compared to listed bonds.

Unlisted Bonds Taxation

Tax treatment of unlisted bonds differs slightly from listed ones, especially in terms of capital gains and holding period.

1. Interest Income:

Interest earned on unlisted bonds is taxable under the head “Income from Other Sources” and added to the investor’s income. It is taxed at the applicable income tax slab rate.

2. Capital Gains on Sale:

If unlisted bonds are sold before maturity, capital gains taxation depends on the holding period:

• Short-Term Capital Gains (STCG):

If held for less than 36 months, gains are added to the investor’s income and taxed as per their income tax slab.

• Long-Term Capital Gains (LTCG):

If held for more than 36 months, the gains are taxed at 20% with indexation benefits.

This makes it important for investors to maintain accurate purchase and sale records to compute taxes appropriately.

Advantages of Unlisted Bonds

• Higher Flexibility for Issuers: Issuers can raise capital without undergoing listing formalities.

• Customized Structures: Bonds can be structured to suit specific investor or project needs.

• Diversification: Allows investors to access niche opportunities across sectors.

• Potential for Higher Yields: Since they are privately placed, issuers may offer slightly higher rates to attract investors.

Risks of Unlisted Bonds

Despite their advantages, unlisted bonds come with certain risks that investors should carefully evaluate:

• Liquidity Risk: Absence of an exchange listing can make resale challenging.

• Credit Risk: Issuers may default on payments, especially in private or lower-rated firms.

• Price Discovery Risk: Lack of secondary market pricing transparency.

• Regulatory Limitations: Restricted accessibility for retail investors due to compliance requirements.

Hence, unlisted bonds are generally suitable for experienced or institutional investors who understand risk management and due diligence.

Regulatory Framework for Unlisted Bonds in India

The issuance and trading of unlisted bonds are governed by:

• SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021

• Companies Act, 2013 (for private placement rules)

• RBI Guidelines (for NBFCs and financial institutions)

Issuers must adhere to disclosure norms and obtain credit ratings from SEBI-registered rating agencies before offering bonds, ensuring that investors have access to necessary risk information.

Conclusion

Unlisted bonds form an important part of India’s growing fixed-income landscape, offering issuers flexibility and investors an alternative to traditional exchange-traded instruments. However, the absence of exchange listing makes due diligence, credit assessment, and liquidity evaluation crucial before participating in such offerings.

As awareness grows and regulatory frameworks evolve, unlisted bonds are expected to find a stronger foothold among sophisticated investors who understand both the opportunities and inherent risks of these instruments.

FAQs on Unlisted Bonds

1. What are unlisted bonds?

Unlisted bonds are debt instruments that are not listed on recognized stock exchanges and are typically sold through private placements or over-the-counter markets.

2. Are unlisted bonds safe?

Their safety depends on the creditworthiness of the issuer. Since they lack exchange listing, they carry higher liquidity and credit risks compared to listed bonds.

3. How is interest from unlisted bonds taxed?

Interest income is added to your taxable income and taxed as per your income tax slab.

4. Can retail investors buy unlisted bonds?

While primarily meant for institutions and HNIs, retail investors can access certain unlisted bonds through regulated platforms and intermediaries.

5. How are unlisted bonds different from listed bonds?

Listed bonds trade on exchanges with higher liquidity and transparency, while unlisted bonds are privately placed and traded over the counter.

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.