Unit Linked Debentures

An equity-linked debenture is a hybrid structured product. It is a zero-coupon bond and its returns are linked to an index such as the Nifty or the Sensex or a basket of stocks. There is no fixed rate payout like other debentures which are usually linked to debt instruments.  The zero-coupon bond matures to the principal by the end of the tenor of the product and the rest is used to effectively create the payoff of the structure (the variable market linked coupon). Higher the interest rate, the better is the payoff to the customer.  These debentures are issued by nonbanking finance companies (NBFCs) to meet their credit requirements. Industry experts say NBFCs meet 40% of their credit requirements through these debentures.  The argument put forward is that it is a ‘small’ price that you pay in return for any structured product with protection. Also this product, in itself, is not very liquid. These debentures are not easily traded. The money is usually locked in for a certain duration, usually 2-3 years, in these debentures.

 

 

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