NCDs, Term Loans, and Mezzanine: Choosing the Right Instrument

Ask most Indian mid-market CFOs why they picked a term loan over an NCD, or an NCD over mezzanine, and the honest answer is often: because that's what our banker suggested. Which is a fine reason if your banker was thinking about the right structure — and a very expensive reason if they were thinking about what they had on the shelf.

This guide walks through the three most common debt instruments for growing Indian companies — term loans, NCDs, and mezzanine debt — and when each one is genuinely the right fit.

The three instruments, at a glance

Instrument	Typical tenor	Cost (indicative)	Security	Lender pool
Term Loan	3–7 years	10–14% p.a.	Secured or unsecured	Banks, NBFCs
NCD	3–10 years	11–16% p.a.	Secured or unsecured	Mutual funds, insurers, AIFs, family offices
Mezzanine	4–7 years	15–22% p.a.	Subordinated, often with warrants	AIF Cat II debt funds, private credit

Ranges are indicative and shift with borrower profile, market conditions, and negotiation. But the shape of the difference between them is fairly stable.

Term loans

A term loan is the most straightforward form of debt: a bilateral agreement between one borrower and one lender (usually a bank or NBFC), with a fixed repayment schedule over a set tenor.

When a term loan is the right instrument

• You have a specific use of funds — plant & machinery, project finance, expansion capex
• Ticket size ₹5–50 Cr (bilateral debt beyond this becomes harder to place through a single lender)
• You want the fastest, cleanest process — a plain term loan through a bank you already have a relationship with is usually the shortest path to funded
• You have collateral to pledge that will get you meaningfully better pricing (secured term loans are typically 200–400 bps cheaper than unsecured)

When a term loan is the wrong instrument

• You need a longer tenor than banks will offer (typically capped at 5–7 years for corporate borrowers)
• You need structured cash flows — moratorium, step-up, balloon — that banks are usually inflexible about
• You've hit the exposure limit any single lender can take on you
• You want investor diversification (multiple parties funding one obligation)

NCDs (non-convertible debentures)

An NCD is a debt security. Legally, it's not a loan — it's an issuance of debentures under the Companies Act. Investors subscribe to the NCDs; the company issues them. This distinction sounds technical but has real consequences.

Because NCDs are securities, they can be:

• Listed or unlisted — listed NCDs give investors an exit route and typically price slightly better; unlisted are faster to issue
• Rated or unrated — most NCDs above ₹5 Cr need a rating (CRISIL, ICRA, CARE, India Ratings, Brickworks); rating adds 4–6 weeks and ₹3–8 lakh to the process
• Held by multiple investors — mutual funds, insurance companies, AIF debt funds, family offices, and increasingly HNIs
• Structured flexibly — moratorium periods, bullet repayment, step-up interest, secured or unsecured, callable or non-callable

When NCDs are the right instrument

• You need a longer tenor than a bank/NBFC will offer — NCDs regularly go to 7–10 years
• You want structured cash flows (moratorium, bullet at maturity)
• You need a larger ticket size than any single bank/NBFC will take on you
• You want to broaden your investor base beyond traditional lenders
• You're planning multiple debt raises and want to establish a rating and NCD track record for future issuances

When NCDs are the wrong instrument

• You need money fast — the rating process and legal documentation typically take 6–10 weeks even for a clean issuance
• Ticket size below ₹15–20 Cr — the fixed costs of an NCD (rating, legal, listing if applicable) don't amortise well at small sizes
• You have a strong existing bank relationship that will fund the same requirement at a materially lower rate
• You're a first-time issuer with no rating history — the first NCD is always more expensive and slower than the second

Mezzanine debt

Mezzanine is a hybrid — it sits between senior debt and equity in your capital structure. Legally it's usually structured as a subordinated NCD or a specific mezzanine facility from a private credit fund. Economically, it behaves like expensive debt with occasional equity-like features.

What makes mezz different

• Subordination — mezz lenders get paid after senior lenders in a default. This is why it's priced 400–800 bps above senior debt.
• Structured returns — mezz often has a cash coupon (say 12–14%) plus PIK interest (interest that accrues and gets paid at maturity, adding another 3–5%) plus sometimes warrants or equity kickers
• Longer tenor — typically 4–7 years, sometimes with a partial or full bullet repayment
• Fewer covenants than senior debt — mezz lenders take pricing for the risk rather than trying to control the borrower through covenants

When mezzanine is the right instrument

• You've maxed out senior debt capacity but need more capital for a specific move (acquisition, expansion, refinancing)
• You don't want equity dilution at current valuations
• Your business generates strong cash flow but the specific transaction (acquisition finance, LBO, growth capex) needs longer tenor than senior lenders will offer
• You have a clear repayment story — mezz needs to be paid back from operating cash flow or a refi within tenor, not from equity conversion

When mezzanine is the wrong instrument

• Your business can't service 15–20% cost debt — mezz strangles marginal businesses
• You're using it as a substitute for equity because you can't raise equity — this rarely ends well
• You don't have a credible refinance or repayment plan by the end of tenor
• Your senior lenders won't consent to subordinated debt above them (some senior facilities restrict this)

The cost of the wrong instrument isn't the interest rate. It's the strategic move you can't make three years from now because the current structure won't let you.

How to actually decide

The framework we use is a three-part conversation:

1. What's the use of funds, and over what horizon?

Short-cycle working capital (receivables, inventory) doesn't need a 7-year instrument. Long-tenor capex or acquisition finance shouldn't be forced into a 3-year term loan that creates refinance risk.

2. What's your existing capital stack look like?

If you already have significant senior debt, adding more senior might push you over covenant thresholds. Mezz might be the only way to add capital without breaking existing agreements — even if it's more expensive.

3. What's the exit / repayment path?

Every debt instrument needs a credible way to be repaid. Term loans amortise. NCDs can bullet at maturity if you can refinance. Mezz usually needs a specific event — a big cash generation cycle, an equity raise, a refinance — to service the balloon or PIK component. If the exit path isn't clear, don't take the instrument.

Common mistakes we see

Choosing a term loan for a long-tenor need. Companies routinely raise 5-year term loans for capex that pays back over 8–10 years, then face refinance stress in years 4–5. An NCD with matched tenor would have avoided this.

Choosing an NCD when a term loan would do. A ₹20 Cr requirement with a 3-year horizon is almost always better as a term loan — the NCD process cost isn't worth it.

Choosing mezzanine because it "looks like equity without dilution." Mezz is still debt. If your business can't service 18% cost debt on a 6-year tenor, no amount of PIK structuring will save you.

Optimising each raise in isolation. Your capital structure is a portfolio. Adding an NCD next year is easier if you have a rating from this year's raise. Taking mezz today constrains what senior debt you can add tomorrow. Think about the next 2–3 moves together, not just the current one.

Common questions

Can I have all three instruments at the same time?

Yes — many mid-market and larger companies have a stacked structure with senior term loans / NCDs at the bottom and mezz on top. The key is that each instrument's covenants have to permit the others, and the total leverage has to be serviceable. This is standard practice for acquisition financing and larger corporate structures.

What's the minimum ticket size for an NCD in India?

Practically, ₹15–20 Cr is the floor below which NCDs stop making economic sense — the rating, legal, and issuance costs are too high to amortise. Below that, a term loan or bilateral loan is almost always more efficient. Above ₹50 Cr, NCDs often become the more efficient structure than term loans.

Do I need a credit rating for a term loan?

Not for a standard bank or NBFC term loan — they run their own internal credit assessment. You do need a rating for public NCD issuances (above certain thresholds under SEBI regulations) and for some AIF debt fund transactions.

Is mezzanine debt available to unlisted companies?

Yes — most mezz in the Indian mid-market is provided to unlisted companies, typically by AIF Cat II debt funds and private credit lenders. Listed companies use it too, but the unlisted mid-market is where the majority of mezz activity happens.

Can NCDs be unsecured?

Yes. Both secured and unsecured NCDs are common in India. Unsecured NCDs price at a premium (typically 100–300 bps over secured NCDs of similar tenor/borrower) and often require a stronger credit rating. Many mezzanine instruments are structured as unsecured NCDs.