What Are Secured Premium Notes?

Last Updated: 8 Sep 2025

For many Indian savers, government securities are the first stop when they seek safety, yet curiosity soon turns to higher-yielding corporate options. Before diving in, investors often ask, what is secured premium notes? These hybrid instruments were popularised in the 1990s and still resurface whenever companies need long-term funds and wish to postpone cash payouts. By understanding secured premium notes meaning, one realises that the promised “premium” is essentially deferred interest wrapped into the redemption price.

Whether you subscribe or stay on the sidelines, remember that secured premium notes trade off interim coupons for a larger lump sum later. Before signing the application, check the prospectus for collateral coverage, call clauses and repayment schedule. Clarify with your broker that the SPN full form in banking documents refers to a “Secured Premium Note” and not a savings product. Maintain a dedicated SPN account in your demat to track the instrument until redemption.

What is SPN (Secured Premium Notes)?

Secured premium notes (SPNs) are financial instruments which are issued with detachable warrants and are redeemable after a certain period. SPN is a kind of non-convertible debenture (NCD) attached with a warrant. It can be issued by the companies with a lock-in period of, say, four to seven years. This means an investor can redeem their SPN after the lock-in period. SPN holders will get the principal amount with interest on an instalment basis after the lock-in period. However, during the lock-in period, no interest is paid.

Thus, SPNs are nothing but a share warrant which are only issued by the listed companies after getting the approval from the central government. An SPN account offers hybrid security, i.e. it combines both features of equity and debt products.

How Do Secured Premium Notes Work?

1.Issuer and Security

• SPNs are typically floated by established companies that need long-term capital but wish to avoid frequent coupon outflows.

2.Coupon Structure

• For the first few years, SPNs usually carry either a very low coupon or no coupon at all.
• Instead of periodic interest payments, the investor is promised a “premium” on redemption, hence the term “premium note.” That premium is essentially additional principal returned over and above the face value.

3.Maturity and Redemption Premium

• Tenors often range from five to fifteen years.
• At the end of this period, the company redeems the notes at a price substantially higher than the issue price, for example, an SPN sold at ₹100 might be redeemed at ₹180 ten years later. The difference of ₹80 functions as the accumulated yield.

4.Optional Convertibility

• Many legacy SPNs issued in the 1990s came with detachable warrants that allowed holders to convert part of their entitlement into equity at a predetermined price.
• Modern variants sometimes skip the conversion feature altogether and stick to a straight debt-plus-premium payoff, which simplifies valuation.

5.Tax Treatment

• In India, the redemption premium is taxed as interest income in the year of receipt, unless the instrument qualifies as a deep-discount bond and is marked to market annually under income-tax rules.
• Indexation benefits, common to listed bonds held over three years, generally do not apply because the gain is treated as interest rather than capital appreciation.

6.Liquidity Considerations

• SPNs are usually privately placed and then listed, but actual trading volumes can be thin.
• Investors must therefore be prepared to hold to maturity or accept a liquidity discount if they exit early in the secondary market.

Features of an SPN

• SPN instruments are issued with a detachable warrant.
• These instruments have a lock-in period of 4 to 7 years.
• No interest is paid during the lock-in period.

After the lock-in period, the holder may sell back the SPN to the company.

The detachable warrants are convertible into equity shares, provided the secured premium notes are fully paid. The conversion of detachable warrants into equity has to be done within the specified time.

After the lock-in period, the holder has an option to sell back the SPN to the company at par value. If the holder exercises this option, no interest/premium is paid on redemption. In case the holder keeps his investment further, he is repaid the principal amount along with the additional interest/premium on redemption in instalments. SPNs were so formulated that the return on investment was treated as capital gain and not regular income. Consequently, the rate of tax applicable was lower.

TISCO (Tata Iron and Steel Company) took the lead in July 1992 by making a mega rights issue of equity shares and secured premium notes aggregating.

Secured Premium Notes vs. Other Financial Instruments

Compared with sovereign debt, SPNs carry higher credit risk because repayment hinges on the issuer’s cash flows rather than the government’s taxing power. That additional risk is compensated by a noticeably higher yield to maturity, especially when the note is issued during periods of elevated interest rates.

Traditional non-convertible debentures (NCDs) pay coupons semi-annually or annually, offering a steady income stream. SPNs, on the other hand, are better for investors who can forgo interim cash flow in exchange for a larger lump sum later. Bank fixed deposits (FDs) provide the greatest predictability, both principal and interest are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakh, but FD rates seldom match the internal rate of return available on a well-priced SPN.

Sovereign securities trade every day on the NDS-OM and RBI Retail Direct platforms. Listed corporate bonds, including NCDs, enjoy moderate liquidity through the stock exchanges. SPNs sit at the bottom of this ladder; secondary-market bids can be sporadic. Mutual-fund units are liquid on any business day at the fund’s net asset value, making them more flexible than a buy-and-hold SPN.

G-Secs qualify as collateral in the clearing corporation, repos, and margin requirements for futures and options. Most SPNs do not, limiting their utility for leveraged strategies. Even among corporate bonds, only those rated AA- and above are accepted as margin by exchanges; unrated or lower-rated SPNs generally do not make the cut. Retail investors can participate in G-Secs with as little as ₹10,000 via RBI Retail Direct. New SPN issues generally target qualified institutional buyers, and the minimum investment can run into lakhs, although a few exchange-listed lots appear occasionally in smaller denominations.

Conclusion

Secured Premium Notes occupy a niche corner. They can be attractive for investors seeking higher returns than sovereign or AAA-rated debt and who are comfortable locking in funds for a long horizon without interim income. Before subscribing, assess the issuer’s credit quality, verify the collateral cover, and understand the tax implications of the redemption premium.

Frequently Asked Questions

1. What type of investor should consider Secured Premium Notes?

SPNs suit long-term investors who do not need periodic interest and are willing to accept moderate credit risk in exchange for a higher overall yield at maturity.

2. How can I monitor the credit health of an SPN issuer during the holding period?

Keep an eye on the issuer’s financial statements, credit-rating updates, and any public disclosures about asset pledges or additional debt.

3. Are Secured Premium Notes guaranteed by the government or any regulator?

No. Although the notes are secured by specific assets, they are not backed by any government guarantee.