FIXED INCOME
Market Linked Debentures
A debenture with a formula instead of a coupon.
What it is
A market linked debenture is a debt security whose return is tied to the performance of a market reference commonly the Nifty 50, a government security yield or a gold index rather than to a fixed coupon. The issuer, usually an NBFC, borrows for a defined tenure and agrees in advance to a payoff formula that decides what you receive at maturity.
MLDs come in two broad shapes:
- Principal-protected: repayment of principal is not contingent on the reference level; only the return varies with it.
- Non-principal-protected: both the return and the principal can move with the reference.
Principal protection is a contractual obligation of the issuer not a third-party guarantee and not insurance. If the issuer cannot pay, the protection does not help you. Issuer credit quality is the first thing to assess, before the payoff.
How it works
01
The term sheet fixes the underlying reference, the observation dates and the payoff formula before you invest.
02
A typical structure pays a stated return if the reference stays above a defined barrier on the observation date, and a different, lower outcome if it does not.
03
Tenure is defined, commonly between one and five years.
04
Most structures pay nothing during the tenure; the payoff lands at maturity.
05
MLDs are listed, and are commonly issued at a face value of ₹1 lakh.
06
A credit rating on the MLD addresses the issuer’s ability to pay. It says nothing about whether the market condition will be met.
Listing does not mean liquidity. Secondary market volumes in MLDs are thin, so plan to hold to maturity.
Who it suits
1
Investors who can read a term sheet and are comfortable with a payoff table rather than a rate.
2
Portfolios that want a defined-outcome exposure with limited, structured market participation.
3
Investors who can hold to maturity without needing interim income.
Less suitable for: anyone who needs regular payouts, investors relying on the instrument for near-term liquidity, and anyone who cannot separately assess issuer credit and payoff risk.
Taxation
Category I and Category II AIFs carry pass-through status. Income other than business income is not taxed at the fund level; it is taxed in the investor’s hands and retains its original character.
• Interest income passes through as interest and is taxed at your slab rate.
• Capital gains pass through as capital gains and are taxed under the applicable capital gains rules.
• Any business income, if the fund earns it, is taxed at the fund level instead.
The fund deducts TDS at 10% on income credited or paid to resident investors. For a top-bracket investor receiving interest income, 10% is well short of the final liability — the gap has to be planned for through advance tax. Non-resident investors are withheld at rates in force, subject to treaty relief where documentation is in order.
Frequently asked
Is principal protection guaranteed?
It is a contractual obligation of the issuer, backed by the issuer’s balance sheet. It is not a guarantee from a regulator, an exchange or any third party, and it does not survive an issuer default.
What happens if the market condition is not met?
You receive whatever the term sheet specifies for that outcome often principal alone, or principal with a reduced minimum return. The payoff table sets this out before you invest; read it carefully.
Can I sell before maturity?
MLDs are listed, but secondary trading is limited and the price you get may not reflect fair value. Treat these as hold-to-maturity instruments.
What is the minimum investment?
MLDs are commonly issued at a face value of ₹1 lakh.
Do I receive a regular coupon?
In most structures, no. The return is settled at maturity based on the payoff formula.
Are MLDs regulated?
Yes. MLDs are issued and listed under SEBI’s framework for market linked debentures, which prescribes listing, disclosure and rating requirements.