What is Bearer Bonds

• Traditional structure: Ownership is associated with possession of the physical instrument.
• Coupon: Physical bearer instruments may carry coupons specifying payment dates and amounts.
• Maturity: The instrument specifies its maturity and redemption terms.
• Indian framework: The Companies Act, 2013 regulates corporate debentures, while applicable SEBI regulations govern relevant securities.
• Dematerialisation: Public offers of securities by companies are required to be in dematerialised form under Section 29 of the Companies Act, 2013.
• Key risks: Physical loss, issuer default, limited liquidity, and legal or regulatory restrictions can affect such instruments.

Bearer bonds are debt instruments traditionally issued in physical form without the owner's name being registered on the instrument. Possession of the instrument establishes the holder's claim under its terms.

A bearer bond may specify its face value, interest or coupon details, maturity date and redemption terms. Attached coupons, where applicable, can specify the dates and amounts of interest payments.

SEBI's glossary describes bearer securities or bearer bonds as securities that do not require registration of the owner's name in the company's books.

However, this historical definition should not be confused with the way most securities are issued and held in India's modern regulated market.

The traditional structure can be understood through the following features:

The exact rights and transfer mechanism depend on the terms of the instrument and the laws applicable to its issue.

In India, modern securities are subject to statutory and regulatory requirements. Section 29 of the Companies Act, 2013 requires every company making a public offer and prescribed classes of companies to issue securities in dematerialised form.

Bearer bonds are not a completely unregulated investment category in India.

The Companies Act, 2013 contains provisions governing corporate debentures. The Act also gives the Securities and Exchange Board of India powers relating to specified issues and transfers of securities.

Section 29 specifically provides that every company making a public offer, along with prescribed classes of companies, must issue securities in dematerialised form. Other companies may issue securities in physical or dematerialised form subject to the provisions of the Act, the Depositories Act and applicable regulations.

What does the RBI Act say about bearer instruments?

The Reserve Bank of India Act, 1934 contains restrictions concerning certain bills, hundis or promissory notes payable to bearer. The provision should be considered in the context of the specific instrument rather than interpreted as a blanket statement that every security described as a bearer bond is prohibited in India.

Accordingly, the legality and permitted structure of a particular instrument must be determined from the applicable law and its specific terms.

For illustration, the instrument could contain:

If coupons are attached, each coupon could specify a payment date and amount. The holder would claim the payment according to the terms of the instrument.

This is only a conceptual example of the traditional bearer-bond structure. It does not mean that XYZ Ltd. or another company can issue such an instrument in India without meeting applicable legal and regulatory requirements.

• Ease of transfer: Traditional bearer instruments could be transferred through physical delivery, subject to the applicable legal framework and instrument terms.
• Possession-based ownership: The holder's possession was central to establishing entitlement under the traditional structure.
• Specified coupon payments: Attached coupons could specify interest payment dates and amounts.
• Physical form: The traditional structure provided a tangible certificate representing the debt instrument.
• Defined maturity: The bond could specify when the principal was due for repayment.

These characteristics explain the traditional appeal of bearer securities but do not establish that they are currently freely transferable or available as an investment product in India.

• Regulatory restrictions: Securities issued and transferred in India are subject to applicable laws and regulations. The original claim that bearer bonds are entirely unregulated is therefore inaccurate.
• Physical loss: A physical certificate can be lost, damaged or stolen.
• Ownership disputes: Possession-based structures can make it difficult to establish entitlement after loss or theft.
• Issuer risk: The issuer may face circumstances affecting its ability to make interest payments or repay principal.
• Liquidity risk: Physical transferability does not automatically mean that a security can be readily sold or redeemed before maturity.
• Traceability: Traditional bearer structures provide less direct identification of the holder than registered or dematerialised securities.

Also read: Tick size

Bearer bonds are traditionally physical debt instruments in which possession of the certificate is central to establishing the holder's entitlement. They can contain coupon details, maturity terms and redemption conditions.

However, bearer bonds are not completely unregulated, risk-free or automatically highly liquid in India. The applicable legal and regulatory framework depends on the nature of the security and its issuer, while dematerialisation requirements apply to specified securities and issues.

Investors should therefore distinguish between the historical concept of bearer bonds and the securities commonly issued and held in India's modern regulated market. Before considering any debt security, review its issuer, terms, regulatory status, repayment structure and applicable risks.