Debentures and corporate bonds in Nepal.

The short answer

A debenture is a loan to a company: fixed rate, fixed term, listed on NEPSE. You are a lender rather than an owner. SEBON has drafted a new regulation to replace the 2016 framework and opened it for feedback — it is not yet in force.

What you actually own

Buy a share and you own a slice of a company. Your return is whatever the business earns and the market pays. There is no ceiling and no promise.

Buy a debenture and you have lent the company money. It owes you interest on a schedule and your principal at the end. That is the entire arrangement.

So the two are not competing versions of the same thing. One is ownership with unknown returns; the other is a contract with known ones.

Debenture, fixed deposit, or share?

A fixed deposit is with a bank, under the banking system’s supervision and protections.

A debenture is with the issuing company. It typically pays more than a deposit, and that extra is not generosity — it is payment for taking company risk instead of bank risk.

A share pays nothing reliably and may be worth far more or far less later.

One real advantage debentures have over deposits: they are listed, so you can sell before maturity instead of breaking the deposit. In practice, debenture trading on NEPSE is thin, so treat that exit as available rather than guaranteed.

Where you sit if things go wrong

If a company runs into trouble, creditors are paid before shareholders. As a debenture holder you are a creditor.

That is genuine protection, and it is not a guarantee. Ranking ahead of shareholders matters only if there is something left to distribute.

What SEBON has proposed

SEBON has drafted a Debenture Registration and Issuance Regulation to replace the framework in use since 2016, and opened it for public comment. It sits inside a broader plan to turn a stock-dominated market into one with a working corporate bond segment.

The main proposals as drafted:

• Non-financial companies could issue. Today the market is overwhelmingly banks and financial institutions.
• Minimum paid-up capital of Rs 1 billion for an issuer, with current audited accounts.
• A debt-to-equity cap of 70:30, to stop issuers loading on debt they cannot service.
• Mandatory NEPSE listing for publicly issued debentures, so they can be traded.
• A mandatory debenture trustee — an independent party to monitor asset backing, check interest is paid on time, and declare a default if terms break.

The trustee requirement is the one worth watching. Fixed income only works when somebody independent is checking that the promises are being kept.

All of this is draft. Clauses can change or be dropped before the regulation is finalised. Read SEBON’s own publications for the current position before making a decision on it.

Common mistake to avoid

Treating a debenture as a slightly better fixed deposit. The higher rate exists because the risk is different, not because you found a loophole. Your money depends on that specific company paying, so the issuer’s financial health is the thing to examine — not just the headline coupon.

Pro tip

Read the offer document for three things: the coupon, the maturity, and whether the debenture is secured against any asset. Then look at the issuer’s accounts the way you would if you were lending them the money personally — because you are.

For bank and financial issuers, the metrics in how to evaluate banking stocks are the same ones that tell you whether a lender is sound.