What Happens When a Bond Defaults in India?
Bond defaults are rare for investment-grade issuers, but they do happen. IL&FS, DHFL, Reliance Capital, and Yes Bank’s Additional Tier 1 (AT1) bonds are among the more prominent Indian examples in recent memory. When a default occurs, the process that follows is not simple or quick. This article explains what a default actually triggers, the roles of the debenture trustee and the NCLT, how the Insolvency and Bankruptcy Code works in practice for bondholders, what recovery rates look like, and what steps retail investors can take to protect themselves before and after a default event.
What constitutes a default?
A bond default occurs when the issuer fails to meet a contractual obligation under the terms of the bond. The two primary triggers are:
Missed coupon payment: The issuer fails to pay the scheduled interest by the due date (or within any applicable grace period, typically 5–30 days as specified in the offer document).
Missed principal repayment: At maturity, the issuer fails to repay the face value to bondholders.
Beyond these primary triggers, most bond indentures include cross-default clauses: if the issuer defaults on any other debt above a threshold amount, it is deemed in default on this bond as well. Material adverse change clauses, breach of financial covenants (such as debt-to-equity ratios), and winding-up petitions can also constitute events of default under some indentures.
For credit rating agencies, a “D” rating is assigned when an issuer defaults or is in the process of defaulting. SEBI regulations require credit rating agencies to review and publish ratings within a specified time after a default event is identified. In practice, rating agencies have often been criticised in India for being slow to downgrade deteriorating credits before defaults crystallise.
The debenture trustee: who they are and what they must do
Every publicly issued NCD (Non-Convertible Debenture) in India must have a SEBI-registered Debenture Trustee (DT). The DT is the legal representative of the collective interests of all bondholders. It is appointed by the issuer at the time of the bond issuance but is legally bound to act in the interest of bondholders, not the issuer.
Major debenture trustees in India include IDBI Trusteeship Services, Catalyst Trusteeship, Beacon Trusteeship, and SBICAP Trustee Company. The quality of the DT — their willingness to act aggressively in bondholders’ interests when things go wrong — varies considerably and is worth noting when evaluating any NCD.
What the DT must do upon default:
- Within 3 days of becoming aware of the default, issue a public notice on the stock exchange.
- Within 30 days of a default, convene a meeting of bondholders to discuss the situation and decide on next steps.
- If bondholders resolve to proceed, the DT can file an application under the Insolvency and Bankruptcy Code (IBC) before the NCLT.
- The DT can also take enforcement action on any security (charge over assets) that was created in favour of bondholders at issuance.
In practice, DTs in India have historically been slow to act and reluctant to take confrontational positions against issuers. SEBI has tightened the regulatory requirements on DTs in recent years (most significantly through the SEBI (Debenture Trustee) Regulations amendments in 2021 and subsequent circulars) to require more proactive monitoring and timely action.
The IBC process: NCLT admission to resolution
The Insolvency and Bankruptcy Code, 2016 (IBC) is the primary legal framework for resolving corporate insolvency in India. The National Company Law Tribunal (NCLT) is the adjudicating authority.
The process has several distinct stages:
Stage 1: Filing and admission
A financial creditor (which includes debenture trustees representing bondholders, or directly by large bondholders who qualify as financial creditors) files an insolvency application under Section 7 of the IBC before the NCLT bench that has jurisdiction over the corporate debtor.
The NCLT must admit or reject the application within 14 days of filing (though in practice, this often takes longer due to judicial backlogs). Upon admission, the Corporate Insolvency Resolution Process (CIRP) formally begins, and a moratorium is declared: all legal proceedings against the company are stayed, and no assets can be transferred or disposed of.
Stage 2: Interim Resolution Professional and Committee of Creditors
On admission, the NCLT appoints an Interim Resolution Professional (IRP). The IRP takes over management of the company from the existing board and promoters. The IRP’s job is to collate a list of all creditors, verify claims, and constitute the Committee of Creditors (CoC).
The CoC consists of all financial creditors, weighted by the amount of their claim. Bondholders (through the debenture trustee) are financial creditors and therefore members of the CoC. Banks, NBFCs, and other lenders are also in the CoC. Operational creditors (suppliers, employees) are not members of the CoC but have separate rights under the IBC.
Stage 3: Resolution plan
The Resolution Professional invites bids from potential buyers or investors (called Resolution Applicants). The CoC evaluates and votes on the resolution plans received. A resolution plan requires approval by at least 66% of the CoC by value of claims.
The entire CIRP must be completed within 180 days of NCLT admission. This can be extended by the NCLT by a further 90 days with good cause, and in practice, many large cases (IL&FS, DHFL) have taken years rather than months. The 330-day outer limit specified in the IBC is routinely breached for complex matters.
Stage 4: Liquidation
If no resolution plan is approved within the prescribed period, or if the NCLT rejects all plans, the company goes into liquidation. A liquidator is appointed, assets are sold, and proceeds are distributed in the statutory priority order: secured creditors first (up to the value of their security), then unsecured financial creditors (which includes most bondholders), then operational creditors, then shareholders.
Recovery rates: what bondholders actually receive
The hard reality of Indian bond defaults is that recoveries, particularly for unsecured bondholders, are substantially below face value. This is a function of asset quality at the time of insolvency, the priority waterfall, and the time value of money lost during prolonged resolution proceedings.
| Creditor type | Typical recovery range (Indian experience) | Basis |
|---|---|---|
| Secured financial creditors (banks) | 50–80% in better cases | First charge on specific assets |
| Secured NCD holders (first charge) | 40–70% | Charge on specific assets; often rank pari passu with banks |
| Secured NCD holders (second or subservient charge) | 20–50% | Residual value after first-charge creditors |
| Unsecured NCD holders | 5–30% | Claim on residual assets after all secured creditors |
| AT1 bond holders (bank perpetual bonds) | 0–30% | Contractual write-down or conversion triggers may apply |
| Equity shareholders | Near zero in most cases | Last in the waterfall |
These are indicative ranges based on outcomes from major Indian insolvency cases. Individual outcomes vary widely depending on the quality of assets secured, the resolution plan received, and the decisions of the CoC.
Key Indian case studies
IL&FS (2018): Infrastructure Leasing & Financial Services defaulted on commercial paper and bonds with outstanding obligations exceeding ₹90,000 crore. The government superseded the board and appointed a new one. The resolution is handled through a government-supervised entity framework rather than standard IBC because of the systemic nature of the default. Different SPVs under IL&FS have had different resolution outcomes. The case highlighted how quickly a AAA-rated entity can deteriorate.
DHFL (2019): Dewan Housing Finance Corporation Limited defaulted across multiple instruments. NCD holders were represented in the IBC process; the company was acquired by Piramal Capital and Housing Finance. Secured NCD holders received significantly higher recovery than unsecured ones. The resolution took over two years after NCLT admission.
Yes Bank AT1 bonds (2020): When Yes Bank was placed under a moratorium by the RBI in March 2020 and a reconstruction scheme was implemented, the RBI directed that Additional Tier 1 bonds totalling approximately ₹8,415 crore be written down to zero. AT1 bonds contain contractual clauses allowing full write-down if the bank’s Common Equity Tier 1 ratio falls below a threshold or if the regulator determines the bank is non-viable. This case reminded retail investors that AT1 bonds are not conventional bonds — their risk profile is fundamentally different.
Reliance Capital (2021): Anil Dhirubhai Ambani Group’s financial services holding company defaulted. The IBC resolution process has been prolonged due to the complexity of the group structure. NCD holders have faced significant delays and uncertainty about final recovery values.
What retail investors can do
Before investing — at the screening stage:
- Distinguish between secured and unsecured NCDs. Read the security section of the offer document or listing document carefully. “First charge on receivables” offers more protection than “second charge on specific assets.”
- Check the debenture trustee. Research whether the DT has a history of active enforcement or has been slow in past defaults.
- Evaluate the issuer’s asset quality independently. For NBFCs, look at gross NPA ratios, capital adequacy, and concentration risk in the loan book — not just the credit rating.
- Diversify. Concentrating a large proportion of a fixed income portfolio in a single issuer or sector eliminates the cushion that makes bond investing manageable over time.
After a default event:
- Do not panic-sell in the secondary market immediately after a default announcement. Secondary market prices often overshoot to the downside in the first few days as distressed sellers exit. The eventual recovery may be higher than the panic price.
- Monitor the DT’s communications. The DT is required to publish updates on BSE/NSE. Track these disclosures carefully.
- Participate in bondholder meetings if possible. The DT convenes these; bondholders have a vote on key decisions through their representative in the CoC.
- Consult a lawyer if your holding is large. Individual retail investors with small holdings typically cannot participate directly in IBC proceedings. But holders above certain thresholds can engage directly as financial creditors. An insolvency lawyer can advise on whether direct engagement is warranted.
- File your claim with the Resolution Professional once CIRP begins. If you do not file a claim within the prescribed period, you may be excluded from the distribution of proceeds. Monitor the public NCLT notices for filing deadlines.
Disclaimer: This article describes general legal and regulatory processes involved in bond defaults in India for informational purposes only. Legal outcomes in specific insolvency cases depend on many factors beyond what is described here. Recovery rate figures are illustrative based on historical cases and are not guarantees of future outcomes. This article is not legal advice. RetailBonds.in is not a SEBI-registered intermediary. See our full disclaimer.