Most Nepali investors think of investing as buying stocks on NEPSE. If you mention "fixed income" or "bonds," eyes glaze over. Debentures are seen as boring, low-return instruments for old people.
This perception is wrong — and costly.
Debentures and bonds are the second-largest asset class on NEPSE after equities, yet fewer than 5% of retail investors actively trade or hold them. They offer predictable income, lower risk than stocks, and a way to earn significantly better returns than bank fixed deposits. For anyone approaching retirement, building a passive income stream, or simply wanting to reduce portfolio volatility, fixed-income instruments deserve a serious place in your investment strategy.
This guide covers everything: what debentures are, how to buy them, how they trade, what returns to expect, and what risks to watch.
What Are Debentures?
A debenture is a debt instrument issued by a company to raise money from the public. When you buy a debenture, you are lending money to the company. In return, the company promises to:
- Pay you a fixed interest rate (called the coupon) at regular intervals (usually semi-annually)
- Return your principal (called the face value) at the end of a specified period (called the maturity)
Key difference from shares:
- A share makes you a partial owner of the company (equity)
- A debenture makes you a creditor of the company (debt)
- Shareholders get dividends (variable, not guaranteed). Debenture holders get interest (fixed, contractually guaranteed).
- In liquidation, debenture holders get paid before shareholders.
Think of it this way: buying a debenture is like giving a formal loan to a company, with written terms about interest and repayment.
Types of Debentures in Nepal
By Security
Secured debentures: Backed by specific assets of the company (property, plant, equipment). If the company defaults, debenture holders can claim these assets. Most bank and finance company debentures in Nepal are secured.
Unsecured debentures: Not backed by specific assets. Holders are general creditors. Higher risk, so they should offer higher interest rates (though this is not always the case in Nepal).
By Convertibility
Non-convertible debentures (NCDs): The most common type in Nepal. You receive interest payments and get your principal back at maturity. The debenture remains a debt instrument throughout its life.
Convertible debentures: Can be converted into equity shares of the company at a predetermined ratio after a specified period. Rare in Nepal but occasionally issued. They offer lower interest rates in exchange for the upside potential of conversion.
Partially convertible debentures: A portion converts to equity, the rest is redeemed as cash. Very rare in Nepal.
By Listing
Listed debentures: Traded on NEPSE in the secondary market. You can buy and sell them like stocks (though with much lower liquidity).
Unlisted debentures: Not traded on any exchange. You hold them to maturity and collect interest. More common for private placements.
How to Apply for Debentures (Primary Market)
The process is very similar to applying for shares through an IPO:
Step 1: Watch for Announcements
Companies announce debenture issues through newspapers, SEBON notices, and financial news websites. SEBON must approve all public debenture issues.
Step 2: Apply Through MeroShare
Just like IPO applications, debenture applications are submitted through MeroShare using the ASBA (Application Supported by Blocked Amount) system.
- Log into your MeroShare account
- Navigate to "Apply for Issue" and find the debenture issue
- Enter the number of units (each unit is typically NPR 1,000 face value)
- Minimum application: Usually NPR 10,000 to NPR 25,000 (10-25 units)
- Submit — your bank account is blocked for the application amount
Step 3: Allotment
Unlike IPO shares which are allocated by lottery, debenture allotment often follows a different process:
- If the issue is oversubscribed, allocation may be proportional (pro-rata) or by lottery
- Many debenture issues in Nepal are not heavily oversubscribed, so you may get full allotment
- After allotment, units are credited to your DMAT account
Key Differences from IPO Application
| Factor | IPO (Shares) | Debenture Issue |
|---|---|---|
| Minimum application | Usually 10 kitta | Usually NPR 10,000-25,000 |
| Application unit | Per share (par NPR 100) | Per unit (par NPR 1,000) |
| Allotment method | Lottery | Pro-rata or lottery |
| Returns | Dividends (variable) | Interest (fixed) |
| Maturity | No maturity | Fixed maturity (5-10 years) |
Trading Debentures on NEPSE (Secondary Market)
Once listed, debentures trade on NEPSE just like stocks. However, there are important differences:
How It Works
- Debentures are listed with ticker symbols (e.g., "NBLD89" for Nabil Bank debenture maturing in 2089 BS)
- You can buy and sell through your TMS (Trading Management System) account at your broker
- Prices fluctuate based on supply, demand, and prevailing interest rates
- Trading volume is typically very low compared to equities
Price vs Face Value
Debentures trade at prices that may be above or below their face value:
- Above face value (premium): When the debenture's coupon rate is higher than current market interest rates. Investors pay extra for the higher income stream.
- Below face value (discount): When the debenture's coupon rate is lower than current market interest rates. Investors demand a discount to accept the lower income.
- At face value (par): When the coupon rate matches current market rates.
Example: A debenture with NPR 1,000 face value and 10% coupon. If market rates drop to 7%, this debenture becomes valuable (above-market income), so it trades at NPR 1,050-1,100. If market rates rise to 12%, the debenture becomes less attractive, trading at NPR 900-950.
Why Liquidity is Low
Most retail investors buy debentures to hold until maturity and collect interest. They have no reason to sell. This means:
- Very few sellers in the secondary market
- Wide bid-ask spreads (5-10% sometimes)
- You may not be able to buy the debenture you want at your desired price
- Selling before maturity may require accepting a significant discount
Interest Rates and Returns
Typical Coupon Rates in Nepal
| Issuer Type | Typical Coupon Rate | Risk Level |
|---|---|---|
| Commercial banks | 8-10% | Low |
| Development banks | 9-11% | Low-Medium |
| Finance companies | 10-12% | Medium |
| Corporate (non-financial) | 10-13% | Medium-High |
| Government bonds | 6-9% | Very Low |
Comparison with Fixed Deposits
| Feature | Debenture | Fixed Deposit |
|---|---|---|
| Interest rate | Usually 1-3% higher | Base rate |
| Liquidity | Low (can trade but thin market) | High (penalty for early withdrawal) |
| Security | Secured by assets / unsecured | Deposit guarantee up to NPR 5 lakh |
| Tax | 15% TDS on interest | 5% TDS on interest |
| Tenure | 5-10 years typically | 3 months to 5 years |
| Tradability | On NEPSE if listed | Not tradable |
Key insight: Debentures typically offer 1-3% higher annual interest than equivalent-term fixed deposits at the same bank. Over a 7-year period, this difference compounds significantly.
Yield to Maturity (YTM) Concept
If you buy a debenture in the secondary market at a price different from face value, your actual return is not the coupon rate — it is the yield to maturity.
YTM accounts for:
- The coupon payments you will receive
- The difference between your purchase price and the face value you receive at maturity
- The time remaining to maturity
Example: You buy a 10% coupon debenture at NPR 950 (5% discount to face value of NPR 1,000) with 5 years remaining. Your YTM is approximately 11.2% — the coupon rate PLUS the capital gain from buying below face value, spread over 5 years.
Government Bonds and Treasury Bills
Beyond corporate debentures, Nepal has government securities that retail investors can access:
Treasury Bills (T-Bills)
- Issuer: Nepal Rastra Bank on behalf of the government
- Tenure: 28 days, 91 days, 182 days, 364 days
- Minimum investment: NPR 100,000 (institutional) — retail access is limited
- Risk: Essentially zero (sovereign guarantee)
- Returns: Currently 4-7% depending on tenure
- How to buy: Through bank participation in NRB auctions (ask your bank if they offer retail T-bill access)
Development Bonds (Bikas Patra)
- Issuer: Government of Nepal
- Tenure: 5-20 years
- Returns: 7-9% typically
- Tax benefit: Interest may be tax-free on certain citizen savings certificates
- How to buy: Through NRB's designated selling agents (banks)
Citizen Savings Certificates (Nagarik Bachat Patra)
- Issuer: Government of Nepal
- Tenure: 5 years, 10 years
- Returns: 8-10% (usually higher than development bonds)
- Key feature: Often tax-free interest for individual Nepali citizens
- Limit: Per-person investment cap (usually NPR 10-25 lakh)
- How to buy: Through designated commercial banks
These are arguably the safest investments in Nepal and offer attractive returns. The main limitation is availability — they are often fully subscribed quickly.
Credit Rating in Nepal
What is a Credit Rating?
A credit rating is an independent assessment of a debenture issuer's ability to repay its debt. It tells you how likely the company is to default on interest payments or principal repayment.
Rating Agencies in Nepal
ICRA Nepal and CARE Nepal are the two active credit rating agencies. They assign ratings like:
| Rating | Meaning | Investment Grade? |
|---|---|---|
| AAA | Highest safety | Yes |
| AA+, AA, AA- | High safety | Yes |
| A+, A, A- | Adequate safety | Yes |
| BBB+, BBB, BBB- | Moderate safety | Yes (borderline) |
| BB and below | Speculative | No |
Why Ratings Matter
- SEBON requires credit rating for all public debenture issues
- Banks and institutional investors have minimum rating requirements
- A higher-rated debenture offers lower returns but higher safety
- A downgrade during the debenture's life can cause its market price to drop
Practical rule: Stick to debentures rated A- or above for your core fixed-income allocation. Anything below carries meaningful default risk.
Tax Treatment
Interest Income
- TDS (Tax Deducted at Source): 15% on debenture interest paid to individuals
- This is higher than the 5% TDS on bank fixed deposit interest
- If your total income is below the tax threshold, you can claim a refund
Capital Gains
- If you sell a debenture in the secondary market at a profit, capital gains tax applies (5% for individuals holding more than 365 days, 7.5% for shorter holdings)
- Most debenture holders hold to maturity, making capital gains rare
Tax Efficiency Comparison
The higher TDS (15% vs 5%) partially offsets the higher interest rate that debentures offer over FDs. Always calculate your after-tax return:
Example:
- FD at 9% with 5% TDS = 8.55% after tax
- Debenture at 11% with 15% TDS = 9.35% after tax
- Net benefit of debenture: 0.80% additional after-tax return
Risks of Debenture Investing
1. Default Risk (Credit Risk)
The company may fail to pay interest or return principal. While secured debentures offer some protection, recovery from distressed companies is slow and uncertain in Nepal.
Mitigation: Stick to highly-rated issuers (banks and large corporates). Diversify across multiple debentures.
2. Interest Rate Risk
If market interest rates rise after you buy a debenture, your fixed coupon becomes less attractive, and the market value of your debenture falls. You are locked into a below-market rate.
Mitigation: Ladder your debentures across different maturities (some short, some long). This ensures you always have some maturing soon to reinvest at new rates.
3. Liquidity Risk
You may be unable to sell your debenture in the secondary market when you need cash. Thin trading means you may have to accept a significant discount to find a buyer.
Mitigation: Only invest money you will not need before maturity. Keep liquid reserves (FDs, savings) for emergencies.
4. Inflation Risk
If inflation exceeds your debenture's interest rate, your real (inflation-adjusted) return is negative. With a 10% coupon and 8% inflation, your real return is only 2%.
Mitigation: Choose debentures with rates that provide at least 2-3% above expected inflation. Consider shorter maturities during high-inflation periods.
5. Reinvestment Risk
When your debenture matures, you must reinvest at whatever rates prevail at that time. If rates have fallen, your income decreases.
Mitigation: Ladder maturities so that not all your debentures mature at the same time.
Who Should Invest in Debentures?
Good Fit
- Retirees needing predictable income streams
- Conservative investors who cannot tolerate stock market volatility
- Anyone with a 3-5 year time horizon for specific goals (child's education, house purchase)
- Portfolio diversifiers who want to reduce overall volatility while earning better than FD rates
- Income-focused investors building passive cash flow
Not Ideal For
- Young investors with 15-20 year horizons (equities will likely outperform)
- Investors needing liquidity (debentures are hard to sell quickly)
- Inflation-worried investors (fixed income loses purchasing power during high inflation)
Recommended Allocation by Age
| Age Group | Equity (NEPSE stocks) | Fixed Income (Debentures/Bonds) | Cash/FD |
|---|---|---|---|
| 20-35 | 70-80% | 10-20% | 10% |
| 35-50 | 50-65% | 25-35% | 10-15% |
| 50-60 | 30-45% | 40-50% | 15-20% |
| 60+ | 15-25% | 50-60% | 20-25% |
These are guidelines, not rules. Your risk tolerance and income needs should dictate the actual split.
Practical Steps to Get Started
Step 1: Ensure Your Infrastructure is Ready
You need:
- An active DMAT account
- MeroShare access (for primary market applications)
- A TMS account with a broker (for secondary market purchases)
If you already invest in stocks, you have all of this.
Step 2: Start with Bank Debentures
Commercial bank debentures are the safest and most common. They offer 8-10% coupons, are secured, and carry minimal default risk. Start here before exploring riskier corporate debentures.
Step 3: Check Upcoming Issues
Monitor SEBON's website and financial news for upcoming debenture issues. Apply through MeroShare when issues open.
Step 4: Explore the Secondary Market
Browse listed debentures on NEPSE. Look for:
- Trading below face value (potential YTM enhancement)
- Maturity dates that match your investment horizon
- Issuers with strong credit ratings
Step 5: Build a Ladder
As you accumulate debentures, aim for maturities spread across different years. This gives you regular cash flows and reinvestment opportunities.
Step 6: Monitor Your Holdings
- Track interest payment dates (usually semi-annual)
- Watch for any credit rating changes on your holdings
- Monitor market interest rates — if rates fall significantly, your existing debentures become more valuable
Debentures and bonds will never be as exciting as watching your stock portfolio double in a bull market. But they serve a critical function: providing stable, predictable income with lower risk than equities. In a market as volatile as NEPSE, having a fixed-income anchor in your portfolio lets you weather corrections without panic, collect regular income regardless of market direction, and sleep better at night. That peace of mind has real value — and the returns are not bad either.