Bearer bonds are a physical financial instrument whose ownership is governed by possession and terms defined by the issuer. The coupons attached to the bonds determine the return or rewards to the bearer. The mechanism of their movement can be compared with that of hard cash. With little to no regulation on transfer, bearer bonds follow the adage of ‘finders keepers and losers weepers’.

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Bearer bonds are a debt instrument carrying a promise to pay the bearer fixed payout upon presentation of attached coupons and full value upon surrender of the instrument. They are a form of promissory note printed out on paper and issued either by governmental or private entities. The coupons are attached to the bond. Each coupon specifies the date and amount of payout. Any individual or entity may purchase these bonds and present the coupons on or after the due date to the issuer to encash the coupon value.

Neither the purchase or transfer of bearer bonds is registered, nor is the transaction overseen by any regulatory body (like SEBI). The onus falls on the issuer of the bond (government or non-government entity) to internally register the issue and payout.
 

Bearer bonds - An example

Let us say the company ‘XYZ Ltd.’ is in the business of textile manufacturing. The company runs two manufacturing facilities in the city that meet regional consumer demands. The owners of XYZ now wish to export textiles and plan to set up a larger facility outside the city. To fund this expansion, they decide to raise funds through the issue of bearer bonds.

All transactions relating to printing the bonds, issuing, and collecting funds are done through physical interaction and manual exchange of bond paper and cash. The bonds are issued in varying denominations from Rs. 10,000 to Rs. 1,00,000. The term of the bond is 10 years, with the maturity date specified as 1st July 2034. The coupon rate is 5%, and each coupon is stamped with payout dates as 31st December 2024, 1st July 2025, etc., during the term of the bond.

The owner of the bond must only present this coupon on or after the due date to XYZ Ltd. to receive their return in cash. On expiry of the term, the bond may be surrendered to receive redemption value.

• Ease of use: Bearer bonds can quickly move hands without elaborate paperwork or formalities. It is as simple as the act of movement of cash from person A to B.
• Non-traceable: Unlike shares, the owners of bearer bonds are not identifiable from the face of the instrument. With no formal mechanism to trace movement, the owners may remain perennially anonymous. This proves useful for discreet transactions like corporate investigations or small transactions among friends or family.
• Fixed return: Bearer bonds promise a fixed return to the owner if they present the coupons on the due date. In that sense, they are a risk-free investment, and the bearer can be assured of a timely payout.
• Safety: Bonds are rated as less risky compared to other investment avenues like stockholding, mutual funds, or futures. This is because the issuer is obligated to redeem the value of the bond upon expiry of the term.
• Highly liquid investment: Given the mechanism for transfer and redemption, bearer bonds are easily convertible to cash. If the owner of the bond wishes to encash the investment before the expiry of the term, they may present the bond to the issuer, who is obligated to repay the original investment value. 

• Unregulated: The issue, transfer, payout, and redemption of bearer bonds are unregulated, which is a great risk. Funds acquired from any source may be invested or redeemed, leaving no obligation on the bearer or issuer to disclose the same to a regulatory body.
• Anonymity: Any individual or entity may be the owner of a bearer bond. In this era of Know Your Customer (KYC) norms and electronic tracing of funds, an anonymous exchange of coupons for cash is unconventional and risky.
• Safety: Although bonds are viewed as safe investments, the issuer may encounter unforeseen circumstances that result in an inability to honour coupon payments or redemption values. All investments carry an underlying performance risk.
• Physical limitations: As with any physical document, bearer bonds can be easily lost, misplaced, or stolen.
• Lack of regulation: In the absence of a regulatory mechanism for the purchase and transfer of bearer bonds, there exists no recourse for the original bearer to trace the bond in the unfortunate event of loss, damage, or theft.

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Bearer bonds are outdated physical instruments whose risks outweigh the benefits. Since these financial instruments do not fall under the visibility of any regulatory authority, the bearer bond trading landscape is a ripe playground for money laundering by shell companies.