The Risk of Default: Lessons from Past NCD Failures in India

For years, Indian retail investors were presented with a seemingly perfect financial product: the Non-Convertible Debenture (NCD). Pitched as a lucrative alternative to traditional bank Fixed Deposits (FDs), NCDs promised the allure of higher interest rates—often crossing 9% or 10%—with the supposed safety of being a “secured” debt instrument. Retirees seeking regular income, parents saving for their children’s education, and young professionals building their wealth all poured their hard-earned money into these bonds.

However, over the last few years, the Indian financial landscape has been rocked by a series of high-profile corporate defaults. For thousands of retail investors, the promise of secure, high-yield returns turned into a nightmare of frozen funds, legal battles, and permanent capital loss.

If you or your family members were caught in the crosshairs of these defaults, the anxiety, frustration, and sense of betrayal are entirely valid. You were told these were safe. You were shown “AAA” ratings. Yet, the reality was starkly different.

This article explores the hard lessons learned from the catastrophic NCD failures in India—including IL&FS, DHFL, Reliance Capital, and SREI Infrastructure Finance—and outlines how retail investors can protect their wealth moving forward.

The Illusion of Safety: How NCDs Failed Retail Investors

An NCD is simply a loan you give to a company. In return, the company promises to pay you regular interest and return your principal on a specified maturity date. They are “non-convertible” because they cannot be converted into equity shares. Many NCDs are labeled “secured,” meaning they are backed by the company’s assets.

The widespread belief was that even if a company faced trouble, secured NCD holders would be first in line to get their money back. But the bankruptcy and insolvency proceedings of the past half-decade shattered this myth, proving that in the real world of corporate liquidation, “secured” rarely means 100% recovery.

The Giants That Fell: A Timeline of NCD Defaults

The collapse of these financial behemoths didn’t just wipe out wealth; it exposed deep systemic vulnerabilities in India’s shadow banking sector.

1. IL&FS (2018): The Earthquake that Shook the Market

Infrastructure Leasing & Financial Services (IL&FS) was a titan of infrastructure financing, boasting a pristine “AAA” credit rating. When it began defaulting on its debt obligations in late 2018, it sent shockwaves through the entire Indian financial system. The core issue was an “asset-liability mismatch”—IL&FS was borrowing short-term money to fund long-term infrastructure projects. When liquidity dried up, the giant fell. Retail investors who held their debt suddenly realized that even the highest credit rating was not a guarantee against default.

2. DHFL (2019): The Governance Wake-Up Call

Dewan Housing Finance Corporation Ltd (DHFL) was a household name, trusted by thousands of retail investors for its NCDs and fixed deposits. However, allegations of financial mismanagement, complex shell company structures, and siphoning of funds led to its spectacular collapse. DHFL was eventually dragged into the Corporate Insolvency Resolution Process (CIRP). Retail investors spent years in agonizing uncertainty, ultimately facing substantial “haircuts” (losses on their original investment) when the resolution plan was finally approved.

3. SREI Infrastructure Finance (2021)

SREI Infrastructure Finance and SREI Equipment Finance defaulted on their massive debt piles, leading the Reserve Bank of India (RBI) to supersede their boards. For retail investors holding SREI NCDs, the outcome was grim. As the company went through the NCLT (National Company Law Tribunal), investors were treated as creditors subject to an approved resolution plan by NARCL. By late 2023, the NCDs were delisted from stock exchanges, and payouts are now being made in a staggered manner. Many retail investors lost a significant portion of their life savings in the process.

4. Reliance Capital (2021)

Once a crown jewel of the Anil Ambani-led Reliance Group, Reliance Capital faced severe liquidity issues and defaulted on its debt, including NCDs. The RBI intervened, and the company entered insolvency. With the resolution plan recently approved by the NCLT in early 2024, retail investors are once again at the mercy of the distribution waterfall. It served as a painful reminder that even the biggest brand names in India are not immune to financial ruin.

The Deep Emotional Toll

Behind every corporate default is a human story. For many retail investors, NCDs were not speculative bets; they were retirement nest eggs. The psychological toll of realizing your money is trapped is immense. The years spent tracking NCLT hearings, dealing with unresponsive debenture trustees, fighting off recovery scams, and watching the value of your principal shrink have left deep scars on the investor community. The feeling of being let down by credit rating agencies, financial advisors, and regulators is profound and justified.

Vital Lessons for Today’s Investor

The painful history of NCD defaults has rewritten the rulebook for investing in corporate debt in India. Here are the critical takeaways:

1. Credit Ratings Are Backward-Looking

The biggest lesson from IL&FS and DHFL is that credit ratings are not foolproof. A company can hold an “AAA” rating just weeks before a default. Ratings agencies rely on historical data and management disclosures. They often fail to capture rapid changes in liquidity, underlying fraud, or corporate governance failures. Never invest solely based on a rating.

2. “Secured” Does Not Mean “No Loss”

If a company goes bankrupt, your secured NCDs will be settled through the Insolvency and Bankruptcy Code (IBC). In almost every major resolution plan, retail investors have been forced to take significant haircuts. While secured creditors are higher up the pecking order than equity shareholders, you will rarely get 100% of your money back if the company’s assets have depreciated.

3. Beware the Higher Yield Trap

In the bond market, return is directly proportional to risk. If an NCD is offering an interest rate that is 2% to 3% higher than a standard bank FD or a government bond, it is doing so because it carries higher credit risk. Chasing a slightly higher yield is never worth risking the total loss of your principal amount.

4. Liquidity Vanishes in a Crisis

NCDs are listed on stock exchanges, theoretically allowing you to sell them before maturity. However, the moment negative news breaks about a company, buyers disappear. During the DHFL and Reliance Capital crises, retail investors found themselves holding highly illiquid bonds that could not be sold at any price.

5. Look Beyond the Brand Name

Trusting a company simply because it has a recognizable brand name or is promoted by a famous business family is a dangerous strategy. Investors must look under the hood. What is the company’s debt-to-equity ratio? Is there an asset-liability mismatch? Are there allegations of poor corporate governance? If the business model is too complex to understand, it is too risky to invest in.

Moving Forward: How to Protect Your Portfolio

In the wake of these crises, regulatory bodies like SEBI and the RBI have significantly tightened the rules. Disclosure norms have been strengthened, and Debenture Trustees—who act as the guardians of NCD holders—are now mandated to be far more proactive in monitoring covenants and initiating action upon early signs of default.

However, the ultimate responsibility for your money lies with you:

• Diversify: Never put a large portion of your savings into a single company’s NCD. Spread your fixed-income investments across sovereign bonds, high-quality corporate bonds, bank FDs, and debt mutual funds.
• Do Your Own Research: Do not blindly trust your relationship manager or wealth advisor. Their incentives (commissions) may not align with your capital preservation.
• Accept Reality: If you want absolute safety for your capital, stick to Government of India bonds, Post Office schemes, or FDs in systemically important banks.

The defaults of the past decade were a harsh financial awakening for India. While NCDs can still play a role in a well-diversified, risk-adjusted portfolio, they must be approached with healthy skepticism, rigorous due diligence, and the sobering knowledge that in the pursuit of yield, capital preservation must always come first.

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