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Each NCD prospectus describes coupon rates and credit ratings, but how many retail investors read the details on payment mechanics: the part that actually explains what happens if the issuer’s cash flow gets tight right before a payout is due? That’s where the Debt Service Reserve Account (DSRA) and escrow account come into play.
They are structural protective measures that are found in a vast majority of bond and NCD issuances in India and are meant to decrease the likelihood of a coupon being missed. If you are looking at NCDs beyond the headline interest rate, then it is worth your while to learn about these two structures before investing.
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What Is a Debt Service Reserve Account (DSRA)?
A DSRA is a cash cushion set aside by an issuer to make future principal and interest payments, even if operating cash flow falls short in a given period. Think of it as a dedicated “coupon fund” sitting separately from the issuer’s regular working capital, which the trustee (or lender, in project finance deals) can dip into if collections are delayed.
The concept of a DSRA first appeared in project finance, where lenders require a cash reserve set aside by the sponsor for a period of 3 to 12 months of future debt service. The same logic has migrated into structured NCDs and NBFC bond issuances in India. For example, a gold-loan NBFC or an infrastructure-linked issuer may be required to set aside a DSRA for one quarter’s worth of interest, which must be rolled over and replenished as each coupon is paid. Although it does not protect investors from a potential default, it provides the issuer time to resolve a liquidity issue.
Escrow Accounts: The Other Layer of Protection
An escrow account works differently. Rather than a separate reserve, it’s a designated, trustee-monitored bank account through which the issuer’s specific cash flows (say, loan repayments or lease rentals from an underlying asset pool) are routed before being used elsewhere. The debenture trustee has the right to step in and direct the payment of coupons and principal to the investors before the issuer can use the funds for any other purpose, known as a payment “waterfall” in industry language.
This is usually seen in securitized or asset-backed NCDs and is also becoming increasingly common in structured NBFC issuances where a receivable pool backs the debt. The escrow account doesn’t create new money the way a DSRA does; it simply ensures that money already generated by the business reaches bondholders first.
DSRA vs Escrow vs DRR: How These Differ
Investors often confuse these three terms, so here’s a quick comparison:
| Mechanism | What It Does | Who Controls It | Mandatory Under Indian Law? |
| DSRA | Pre-funded cash cushion for upcoming coupon/principal | Debenture trustee/lender | Not mandatory by statute; often a rating agency or deal-specific condition |
| Escrow Account | Routes the issuer’s incoming cash flows to bondholders first. | Debenture trustee (via banking arrangement) | Deal-specific; common in structured/securitized NCDs |
| DRR (Debenture Redemption Reserve) | Reserve built from profits to fund eventual redemption | Issuer, monitored by trustee | Statutory for unlisted companies issuing NCDs via private placement (10% of outstanding value); most listed issuers, NBFCs, and HFCs are now exempt |
Note that DRR requirements were significantly eased by the Ministry of Corporate Affairs in 2019: DRR was removed for listed companies and for specified debenture issues by NBFCs and HFCs, while unlisted companies must maintain 10% of outstanding debenture value (reduced from the earlier 25%).
Latest Bond Updates:
- Understanding DSRA and Escrow Accounts: How NCD Issuers Protect Your Coupons
- How to Read a Bond Credit Rating Rationale Report: A Guide for Investors
- FCNR Deposits vs. Corporate NCDs: Where Should NRIs Invest Surplus Cash in 2026?
SEBI’s Push to Tighten Investor Protection
Structural safeguards rely on the ability of trustees to enforce them, and SEBI has been actively reworking this framework. Through 2025, following a consultation paper and board approval in June 2025, SEBI has been rolling out reforms to strengthen the role of debenture trustees, including:
- Standardization of the Debenture Trust Deed format to ensure that investor rights are not lost in documentation that varies across issuers
- Clarifying how the Recovery Expense Fund (a fund every NCD issuer must create with stock exchanges) can be utilized by trustees for enforcement and legal action in a default
- Introducing clearer, faster mechanisms for trustees to act on behalf of debenture holders without always needing prior investor approval for routine recovery expenses
These changes matter because a DSRA or escrow structure is only as strong as the trustee’s ability to enforce it when things go wrong, which is exactly the gap regulators have been trying to close.
Why This Matters More Now
NCD coupon rates in 2026 range widely: roughly 7–8% for AAA-rated paper up to 11–13%+ for lower investment-grade issuers, according to current market data. Wider spreads mean greater credit risk, and higher-yield NCDs are exactly where structures like DSRA and escrow arrangements need to be employed. A high coupon from a mid-rated NBFC would be more comforting if the offer document shows a funded DSRA and a trustee-controlled escrow waterfall.
What to Check Before You Invest
- Does the offer document mention a DSRA, and if so, how many months of coupon does it cover?
- Is there a defined escrow mechanism, and does the trustee have clear step-in rights?
- Is the NCD secured, and what’s the asset cover ratio relative to outstanding debt?
- Has the credit rating been reviewed recently, and by more than one agency?
- Who is the debenture trustee, and what is their track record on past defaults?
DSRA and Escrow Accounts Frequently Asked Questions
A Debt Service Reserve Account (DSRA) is a reserve maintained to support scheduled debt servicing, such as interest and principal payments, if the issuer’s regular cash flows are temporarily insufficient.
An escrow account is a controlled account into which specified cash flows are deposited and from which payments are made according to an agreed priority. Some NCD structures give debenture holders or the debenture trustee a charge or control over the account.
No. A DSRA is primarily a reserve for debt servicing, while an escrow account is generally a mechanism for controlling and routing specified cash flows. An issuer can use both as part of its payment structure.
No. These are not universal features of every NCD. Investors need to check the term sheet, offer document, and security documents to determine whether a particular issue has a DSRA, escrow arrangement, sinking fund or other credit-enhancement mechanism.
A payment waterfall specifies the order in which money in a controlled account is used. For example, funds may first be earmarked for required reserves and then transferred to accounts used for interest and principal payments. The exact priority should be checked in the issue documents.
The debenture trustee represents the interests of debenture holders and performs duties relating to security, monitoring, and enforcement as applicable. Investors should check the trust deed and transaction documents to understand the trustee’s specific rights over the accounts and security.
Disclaimer
Fixed returns do not constitute guaranteed or assured returns. Investments in corporate debt securities and municipal debt securities/securitized debt instruments are subject to credit risks, market risks, and default risks, including delay and/or default in payment. Read all the offer-related documents carefully. This blog/article should not be construed as financial advice or as an offer or recommendation to buy or sell any security or any products/services of/on GoldenPi or any product/services of its third-party client(s). For a detailed calculation of YTM, visit our website. T&C’s Apply.
