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If you’ve ever owned a corporate bond that just stopped paying interest, you can imagine the tough spot this puts you in. But what happens after that? For India’s increasing number of bond investors, understanding the default and recovery process is now a given. With a growing bond market, knowing your legal standing as a creditor could mean the difference between recovering most of your investment and virtually none of it. This piece walks you through the actual process, the numbers behind recent recoveries, and what determines whether you get paid.
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What Happens When a Bond Issuer Defaults?
A default marks the start of a series of consequences. If an issuer either misses an interest payment or does not pay back the principal on the pledged date, the following chain of events takes place:
- The debenture trustee (who is mandatorily appointed for every bond issue) is bound to act on the bondholders’ behalf and not the company’s.
- Credit rating agencies immediately downgrade the instrument to a ‘D’ for default, triggering panic selling in the secondary market.
- The trustee has the right to call for realization of security (if it is a secured bond), call a debenture holders’ meeting, or petition the National Company Law Tribunal (NCLT).
- If the default is significant, the trustee, other financial creditors, or even the company may initiate the Corporate Insolvency Resolution Process (CIRP) under the IBC.
During this process, most bondholders learn that a default is not the same as a total loss, but the road to potential recovery is long and typically does not result in full repayment.
IBC Priority of Payment: Who Gets Paid First After a Default
Not all bondholders have the same rights. Under Section 53 of the IBC (the “waterfall mechanism”), there is a strict order in which claims are settled, and the position of your bond determines your practical recovery.
| Priority | Claimant Category | Typical Recovery Outlook |
| 1 | Insolvency resolution/liquidation process costs | Paid first, in full |
| 2 | Workmen’s dues (24 months) & secured financial creditors, ranked equally | Best odds among bondholders |
| 3 | Unsecured financial creditors | Moderate, depends on residual value |
| 4 | Government dues & remaining secured creditor claims | Often steep haircuts |
| 5 | Operational creditors & other debts | Frequently deep haircuts |
| 6 | Preference and equity shareholders | Last in line, usually nothing |
This is exactly why the offer document’s fine print, secured versus unsecured, matters more than the headline coupon rate.
IBC Recovery Rates: What Bondholders Actually Get Back
This is the point where it becomes important to distinguish between longer-term averages and the more recent numbers.
Since the IBC became operational, creditors have achieved a recovery of approximately ₹3.99 lakh crore against ₹12.31 lakh crore [1] of admitted claims based on resolution plans sanctioned, which amounts to a total write-off of approximately 67% of the admitted claims and an average recovery of about 32% to 33%.
The same data also indicates that the creditors received 94% of the fair value of the resolved businesses and 170% of the value that would have been recovered in the event of liquidation. The low headline recovery rate expresses the value that had deteriorated by the time it reached the insolvency stage, rather than reflecting the inefficiency of the resolution framework.
The latest trends are even more concerning. As per ICRA, the recovery rate on admitted claims for cases resolved during FY25-26 dropped to 23% [2]; a significant decline from the 46% observed during FY24-25, with the third quarter of FY25-26 alone witnessing steep haircuts of 80%.
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The average duration for the resolution process increasingly surpassed the statutory limit as well, averaging 744 days as of March 2026 instead of the 330-day limit, while liquidation cases, where the recovery is even worse, lasted 531 days, with recovery rates slipping down to 4%.
The trend is clear: resolution of cases (where the company continues to operate) clearly results in better recovery outcomes compared to liquidation; however, resolution of cases has been declining lately.
Essar Steel is a frequently referenced earlier case that is more illustrative of an overall positive trend. Its secured financial creditors recovered around ₹42,000 crore [3] of their dues with exposure of about ₹49,046 crore, which is approximately 92%. This shows that, if the business retains real value, resolution is a far better option than liquidation. However, unsecured and operational creditors did not recover even close to that amount, highlighting the point made above on the priority of claims.
Case Study: How NCD Holders Recovered Dues from Reliance Home Finance
The Reliance Home Finance (RHFL) case is an informative example of the ability of bondholders to claim their rights. After RHFL defaulted on the financial obligations to 19,000 debenture holders, IDBI Trusteeship Services (the debenture trustee) filed a case in the NCLT to recover approximately ₹3,500 crore [4].
The tribunal ordered RHFL to pay the interest and redeem the debentures. RHFL’s assertion that the ongoing resolution should allow for a delay in the payments to the bondholders was dismissed, affirming that the claims of public bondholders couldn’t be overlooked.
The case shows that debenture trustees are not passive intermediaries; their willingness and the speed with which they act greatly influence recovery timelines for bondholders.
Secured vs Unsecured Bonds in India: Which Recovers More After Default?
Before running after the returns, take the recovery mechanisms into consideration.
- Secured NCDs: Backed by certain company assets. In default, the trustee can demand this security directly, often leading to larger and swifter recovery.
- Unsecured NCDs: No collateral, and recovery relies on cash flows and the outcome of the resolution, placing bondholders lower in the liquidation waterfall.
- Listed vs unlisted: Listed bonds provide a mechanism for investors to exit in the secondary market before deterioration of the bond. Investors in unlisted bonds remain trapped until the resolution concludes.
- Rate change, not just the rating: A bond downgraded from ‘AA’ to ‘BBB’ in one year is a red flag, compared to the bond that is stable with a rating of ‘A.’
India’s corporate bond market is comparatively small (15-16% of GDP) and almost completely private placement-driven, which diminishes transparency and increases recovery complexity for retail investors who subscribed to a public NCD issue.
Frequently Asked Questions
A bond default happens when interest or principal payments on a bond are not paid on time. It can also happen when the issuer fails to comply with other contractual obligations that would trigger an event of default.
In such an event, a debenture trustee typically acts on behalf of bondholders, reviews the default circumstances, and takes steps allowed in the bond contracts. Recovery may be accomplished through negotiations, restructuring, enforcing the security (secured bonds), or through insolvency.
When compared to unsecured bondholders, secured bondholders generally have a greater claim on secured assets. In practice, the recovery of both classes of bondholders is determined by the value of the security and the outcome of the legal proceedings.
There is no established timeframe. Recoveries may occur over a period of time ranging from several months to years, based on case and default complexity, restructuring, and legal efforts.
Sources
- https://www.business-standard.com/industry/news/ibc-haircuts-2025-creditor-recovery-cirp-delays-ibbi-data-125112300278_1.html
- https://www.icra.in/CommonService/OpenMediaS3?Key=fe0064b0-f014-4e96-9d36-353ac5484a74
- https://www.financialexpress.com/business/industry-ibcs-big-success-lenders-to-recover-rs-42k-crore-as-arcelormittal-initiates-payment-for-essar-steel-1793527/lite/
- https://economictimes.indiatimes.com/markets/companies/nclt-directs-reliance-home-finance-to-repay-dues-to-its-ncd-holders/articleshow/83812799.cms
