Market linked debentures
A debenture whose return is set by a formula tied to a market, not by a fixed coupon
Rules as in force on 16 October 2026
Verified 16 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room what an 'equity-linked debenture' was. That older name is one type of what is now called a market linked debenture, or MLD. By the end they should be able to say how an MLD's return is decided, how it is taxed, and what the investor is really taking on.
A market linked debenture's return comes from a formula tied to a market level, not from a fixed coupon alone.
For a listed MLD, the issuer borrows your money and promises to repay it at maturity. What it pays on top follows a chosen index or rate, through a formula fixed on day one.
Trainer notes
Keep this up for a moment. The two parts to separate all through the deck: the promise to repay the principal, which depends on the issuer, and the extra return, which depends on a market formula.
Four terms to know first
Debenture
A bond issued by a company. You lend; it owes you the face value at a set maturity date.
The underlying
The market the payout is tied to: often an equity index, a basket of shares, or a rate such as MIBOR.
Participation
The share of the market's move that is passed to you. A 70% ratio turns a 30% index gain into a 21% coupon.
Capital protection
The issuer undertakes to repay the full face value at maturity. These are rated with a 'PP-MLD' prefix.
Take-away: Principal protection is the issuer's promise. It is only as good as the issuer's ability to pay.
Sources: SEBI guidelines for issue and listing of structured products / market linked debentures, 28 Sep 2011; Income-tax Act definition of a market linked debenture.
Trainer notes
A debenture that does not promise the full face value back is not treated as a debt security under SEBI's rules and cannot be listed as one. The PP-MLD prefix on the rating marks a principal-protected MLD.
How the payout is worked out
THE SET-UP
A 3-year MLD, face value ₹1,00,000, linked to an equity index.
Start level 20,000. Participation ratio 70%. Principal is protected at maturity.
- Index rises to 26,000: index move = (26,000 − 20,000) ÷ 20,000 = 30%.
- Total coupon = 30% × 70% = 21%. Maturity value = ₹1,00,000 × 1.21 = ₹1,21,000.
- Index falls to 17,000: index move = −15%. The coupon cannot go below zero.
- You get back the ₹1,00,000 face value, and nothing on top — provided the issuer pays.
Result: Up market: a share of the gain. Flat or down market: your face value back, no return.
Illustration with assumed, invented figures. Not a forecast and not a real product.
Trainer notes
Real MLDs use many payout shapes: caps, floors, digital (all-or-nothing) coupons and barriers. This is the simplest shape. The point to land: the return is scaled by the participation ratio and floored at zero, so the principal, not the return, is what is protected.
What the issuer does with your money
A principal-protected MLD is usually built from two parts.
The protection part
Most of the money is placed so that it grows back to the face value by maturity. This is what funds the promise to repay principal.
The market part
The rest buys exposure to the chosen market, often through options. This is what can pay the extra coupon if the market moves the right way.
Take-away: Both parts sit inside one debenture issued by one company, so both carry that company's credit risk.
Source: SEBI guidelines for issue and listing of structured products / market linked debentures, 28 Sep 2011 (scenario and valuation disclosures).
Trainer notes
This two-part description is the common structure; the offer document sets the actual terms. SEBI requires the offer document to show a scenario analysis: the debenture's value under rising, stable and falling markets.
The rules that govern an MLD
| Area | The rule | Since |
|---|---|---|
| Who may issue | An issuer with a net worth of at least ₹100 crore, meeting SEBI's disclosure rules for structured products. | 2011 |
| Face value | ₹1 lakh for a privately placed listed debt security. The ₹10,000 option is only for plain debt with no structured payout, so it does not cover MLDs. | 1 Jan 2023 |
| Valuation | An agency appointed by AMFI values the MLD. Earlier a SEBI-registered credit rating agency did this. | 13 Jul 2020 |
| Rating | A principal-protected MLD is rated with a 'PP-MLD' prefix before the usual rating symbol. | 2011 |
Sources: SEBI circulars of 28 Sep 2011, 13 Jul 2020, 28 Oct 2022 (face value to ₹1 lakh from 1 Jan 2023) and 3 Jul 2024 (₹10,000 option, plain debt only).
Trainer notes
The ₹10,000 face-value option (July 2024; zero-coupon added December 2025) needs a merchant banker, a plain structure and no structured obligations, so a market-linked payout keeps the ₹1 lakh floor. Net worth and disclosure norms come from the 2011 guidelines, carried into SEBI's NCS master circular.
Where the rules stand
These are regulatory and tax rules in force on 16 October 2026, not market prices.
- FACE VALUE FLOOR
- ₹1 lakhMinimum for a privately placed MLD since 1 January 2023 (earlier ₹10 lakh).
- ISSUER NET WORTH
- ₹100 crIssuer's minimum net worth at the time of issue (SEBI, 2011; carried forward).
- TAX ON GAINS
- Slab rateShort-term, at slab rate, any holding period, on sale or maturity from 1 April 2023.
Sources: SEBI circulars of 28 Sep 2011 and 28 Oct 2022; Income-tax Act 2025 section 76 (formerly section 50AA, Finance Act 2023).
Trainer notes
State the rule and stop. The tax change is the single most important update for anyone who learnt the old treatment. These are rules, not price data, so the latest position is used.
If you learnt this from older material
What older decks say
- They are called equity-linked debentures (ELDs).
- Gains after a year are long-term, taxed at 10% without indexation.
- Minimum ticket: ₹10 lakh (2011).
- A credit rating agency values the debenture.
What holds now
- The category is market linked debentures (MLDs).
- Gains are short-term at slab rate, any holding period, since 1 Apr 2023.
- The face value is ₹1 lakh, since 1 Jan 2023.
- An AMFI-appointed agency values it, since 13 Jul 2020.
Take-away: The biggest change is tax: the long-term benefit on MLDs was removed from 1 April 2023.
Sources: Income-tax Act 2025 s.76 (ex s.50AA, Finance Act 2023); SEBI circulars of 13 Jul 2020 and 28 Oct 2022.
Trainer notes
Before the Finance Act 2023, a listed MLD held over a year was taxed as a long-term capital gain at 10% without indexation. Section 50AA ended that; now every rupee of gain is short-term at the investor's slab rate.
Four things people get wrong
Misconception'Principal protected means guaranteed.'
What is trueThe protection is the issuer's own promise. If the issuer cannot pay, the protection can fail, and you may not recover all principal.
Misconception'It is a fixed-income product.'
What is trueThe extra return depends on a market formula and can be zero. Some issues add a floor.
Misconception'Held over a year, it is taxed like a bond.'
What is trueNo. Since 1 April 2023 the gain is short-term at your slab rate, whatever the holding period.
Misconception'I can sell it any day at a fair price.'
What is trueMany MLDs trade thinly. Selling before maturity may be hard, and the price then depends on the valuation and a buyer.
What to check before anyone buys one
The payout formula
Which market, what participation ratio, any cap, floor or barrier, and how the start and end levels are fixed.
The issuer's credit
The rating and the issuer behind it. Principal protection is only as strong as the issuer's ability to repay.
The tax
Gains are short-term at the investor's slab rate, whatever the holding period. There is no long-term benefit.
Getting out early
Whether the debenture can be sold before maturity, at what cost, and who provides the valuation.
Take-away: Our ARN covers mutual funds only. We explain MLDs; we do not tell a client to buy or avoid one.
Trainer notes
This is the slide to rehearse. The commonest confusion in practice is treating 'principal protected' as 'risk free'. It is not: it carries the issuer's credit risk, and the return is not assured.
Check yourself
Question 1: An MLD is linked to an index that rises 20%. The participation ratio is 80%. On a ₹1,00,000 face value, what coupon and maturity value does the holder get?
Answer: Coupon = 20% × 80% = 16%. Maturity value = ₹1,00,000 × 1.16 = ₹1,16,000. (Assumed figures; the principal is protected, so a fall would return ₹1,00,000 and no coupon, if the issuer pays.)Question 2: A client says 'my MLD is principal protected, so it is safe.' What two points must you make?
Answer: First, the protection is the issuer's promise, so it carries the issuer's credit risk. Second, the extra return is not assured; it can be zero. Returns are not assured.Question 3: How is the gain on a market linked debenture taxed now, and how did that change?
Answer: Since 1 April 2023 (section 50AA, now section 76 of the Income-tax Act 2025) the gain is a short-term capital gain at the investor's slab rate, whatever the holding period. Earlier, a listed MLD held over a year was taxed as long-term at 10% without indexation.
Sources and disclaimer
Sources for the figures in this explainer
- Definition, issuer net worth ₹100 crore, PP-MLD prefix, scenario disclosures: SEBI MLD guidelines, 28 Sep 2011. Its ₹10 lakh minimum ticket is no longer in the MLD chapter.
- Valuation by an AMFI-appointed agency (earlier a SEBI-registered credit rating agency): SEBI circular SEBI/HO/DDHS/CIR/P/2020/120, 13 July 2020.
- Face value reduced from ₹10 lakh to ₹1 lakh for privately placed listed debt securities, effective 1 January 2023: SEBI circular dated 28 October 2022.
- ₹10,000 face-value option for plain debt, no structured obligations: SEBI circulars of 3 July 2024 and 18 December 2025 (zero coupon added).
- Gains taxed as short-term at slab rate whatever the holding period, from 1 April 2023: section 50AA, Income-tax Act 1961 (Finance Act 2023), now section 76 of the Income-tax Act 2025.
- All amounts, index levels and the participation ratio in the worked example are invented for illustration and are not a real debenture.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).