NCD Prospectus Red Flags: A Checklist Before You Apply
An NCD prospectus or DRHP can run to hundreds of pages, and the credit rating alone doesn't tell you everything. This is a general checklist for what to look for in the document itself — not a verdict on any specific issuer, and not a substitute for reading the whole thing.
Start with the rating rationale, not just the letter grade
The rating agency's detailed rationale document (usually available separately from the agency's own website, and often summarized in the prospectus) explains why a bond got its rating — the specific strengths and weaknesses the agency weighed. Two AA-rated issuers can carry very different risk profiles once you read what's behind the letter grade. See reading a CRISIL rating action for how to interpret the rationale, and check the issuer's full history on our ratings page — a recent downgrade or a rating on negative watch is a signal worth weighing alongside the current letter grade.
Security cover and asset-liability mismatch
For a secured NCD, the prospectus discloses the specific assets pledged and the security cover ratio (the value of pledged assets relative to the bond's outstanding value). A thin cover ratio — assets barely exceeding the debt they secure — leaves less margin if asset values decline or recovery proceedings take a haircut. See secured vs unsecured NCDs for how debenture trustees and floating charges actually work in a real default.
For NBFC issuers specifically, check the asset-liability management (ALM) disclosure — this shows whether the company is funding long-tenor loans with short-tenor borrowing, a mismatch that has been at the center of several well-known NBFC stress events. See how to evaluate an NCD issuer's financials for the balance-sheet metrics that surface this risk.
Related-party transactions
The "Related Party Transactions" section discloses loans, guarantees, or other financial dealings between the issuer and its promoter group, group companies, or key management. Heavy related-party lending — especially loans to group entities on terms not clearly at arm's length — is a pattern worth understanding, since it can mean the funds you're lending the issuer flow onward to related entities with less visibility into their own repayment capacity.
Promoter share pledge
If the issuer or its group has listed equity, check the promoter shareholding pattern for the percentage of promoter shares pledged as loan collateral (disclosed in stock exchange filings, and often referenced in the prospectus's risk factors). A high or rising pledge percentage typically signals the promoter is under liquidity pressure elsewhere — worth weighing against the specific NCD's own security and cash flows, since promoter-level stress can spill into how the issuing entity itself is managed.
Contingent liabilities and pending litigation
The financial statements' notes disclose contingent liabilities — guarantees given on behalf of others, disputed tax demands, pending litigation with a possible financial outcome. Check the disclosed amount relative to the issuer's net worth: a contingent liability that's small relative to net worth is routine; one that's large enough to threaten solvency if it crystallizes is a different order of risk.
Use of proceeds
The stated purpose of the issue matters. "General corporate purposes" or "working capital requirements," stated vaguely with no further breakdown, tells you less than a specific stated use (refinancing a named facility, funding a specific project). Vagueness alone isn't disqualifying — many legitimate issuances use general-purpose language — but a specific stated use gives you more to verify against the rest of the disclosure.
Putting it together: a 7-point checklist
- Read the rating agency's detailed rationale, not just the letter grade — and check the rating's recent trend on our ratings page.
- For secured NCDs, check the security cover ratio and what specific assets back it.
- For NBFC issuers, check the asset-liability mismatch disclosure.
- Check the related-party transactions section for the scale and nature of intra-group lending.
- Check promoter share pledge percentage and its recent trend, if the group has listed equity.
- Check contingent liabilities relative to net worth.
- Check whether "use of proceeds" is specific or generic — and weigh that against everything else, not in isolation.
Key takeaways
- The credit rating and its detailed rationale are the starting point for due diligence, not the finish line.
- Security cover ratio, related-party lending, promoter pledge, and contingent liabilities are the specific prospectus sections that reveal risk a rating letter alone doesn't fully convey.
- This is a general framework to apply to any NCD prospectus you read — it doesn't evaluate or flag any specific issuer.
Related reading: How to read a bond offer document · How to evaluate an NCD issuer's financials · Reading a CRISIL rating action · Check an issuer's rating history →