According to Prime Database, a capital markets data provider, 450 such bonds were issued in the fiscal year ended March 2025, up from 244 in FY24, 120 in FY23 and 75 in FY22. There have been cases of covenant breaches and defaults as well.
Mint examines the risks of investing in these low-rated bonds and the safeguards available to investors.
Why are more low-rated bonds being offered now?
A growing number of lower-rated bonds are appearing on online bond providing platforms (OBPP), and many of these instruments are secured, meaning they are backed by assets or receivables. This structural protection can result in partial or full recovery of the invested amount, including accrued interest, even in times of financial stress or default. This sets bonds apart from many other financial instruments.
There is more demand from retail investors, with bonds becoming more accessible online. For lower-rated companies that were so far reliant on bank loans, demand for bonds has allowed access to more capital.
Experts said most online bond platforms, including INRBonds, IndiaBonds, and Bondbazaar, advise caution, such as encouraging diversified investment strategies (similar to mutual funds), recommending limited exposure to high-yield bonds, and often avoiding marketing BBB and below-rated bonds to uninformed investors.
Though precise data on investor composition is scarce, market participants say high-net-worth individuals, family offices, and AIFs have been increasingly active in recent BBB-rated issuances, alongside select institutional investors.
Issuers of corporate bonds rated BBB+, BBB and BBB- raised ₹17,653 crore in FY25, ₹22,219 crore in FY24, ₹4,944 crore in FY23 and ₹8,634 crore in FY22, according to Prime database. The total corporate bond issuance amounts to ₹9.95 trillion raised through public and private debt issues combined in FY25, according to Sebi data.
What are the risks in lower-rated bonds?
While many protections are built in, lower-rated bonds still carry risks. Rare cases of financial stress can lead to events such as covenant breaches, credit rating downgrades, or accelerated redemption. These are not necessarily failures, but warning signs that make investors reassess risk and take informed decisions.
Mint reported in May that two NBFCs, Ugro Capital and Aye Finance, sought waivers from bondholders for certain covenants, as conveyed by their respective bond trustees. Ugro Capital breached its covenant related to maintaining the capital adequacy ratio, while Aye Finance was at risk of exceeding the limit on stressed assets.
According to Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, accelerated redemption, covenant penalties, and rating triggers are part of a bond’s protection framework, not red flags in themselves. “They allow investors to respond early to rising credit risk, something rarely possible in other products like equities or mutual funds, where values can decline steeply without warning.”
“Bonds, when chosen carefully and diversified appropriately, offer investors a predictable, transparent, and asset-backed investment route. Rather than overreacting to isolated events, the focus should be on investor education, platform transparency, and responsible product selection,” said Srinivasan.
In July, CareEdge Ratings downgraded ₹150 crore worth of TruCap Finance’s bonds to ‘D’, indicating default, along with ₹750 crore of its long-term bank facilities. The downgrade followed the company’s failure to meet interest and principal payments on its non-convertible debentures (NCDs) due on 16 July. A TruCap spokesperson then said the company remains committed to fully repaying all dues.
Mataprasad Pandey, vice president at ARETE Capital Service Pvt Ltd, a financial advisory firm, says that there’s still significant work needed in educating investors about the full range of risks tied to fixed income investments.
“Fixed income, by design, is intended to provide stability and safety within a broader investment portfolio. However, for retail investors, who may lack the knowledge and access that HNIs (High Net-Worth Individuals) or institutional investors possess, risk profiling should be an essential part of the investment process. This is already a mandatory practice for Sebi-registered investment advisors as part of financial planning,” said Pandey.
Pandey added that advisors must clearly communicate all possible risks associated with fixed income instruments, including technical defaults such as delay in payment obligation due to fund unavailability, actual defaults (the broader spectrum of credit risk), interest rate risk, and liquidity risk.
What is a covenant breach, and when does it happen?
A covenant breach occurs when a bond-issuing company fails to comply with agreed-upon conditions. These could include not maintaining a minimum credit rating, keeping non-performing assets (NPAs) below a certain threshold, or delaying planned capital infusion. Even if interest and principal payments are made on time, breaking these covenants can raise concerns. Often, the company must then pay a higher interest rate or step-up coupon until the issue is resolved.
Sachin Gupta, chief rating officer at Care Ratings Ltd, said that the step-up coupon is not really a security. “It is more of a risk-return. So as the risk goes up, the return goes up, because of rating downgrades or covenants.” Gupta said that the investment grade starts from BBB, and many of the entities that breach are in BBB, BBB– kind of range.
“So obviously, the risk is high, and that is where they are able to get a 12–13% kind of coupon. So the retail investor has to be mindful that he is investing in a high-yield, which is a high-risk kind of investment,” said Gupta. India’s benchmark 10-year government bond yield closed at 6.27% on Monday.
In recent months, a growing number of non-banking financial companies (NBFCs) have been tapping retail investors with high-yield bonds. While these offer double-digit returns, they often come with tighter covenants and a higher risk of breach.
What happens to investors when a bond is downgraded?
A covenant breach may trigger a credit rating downgrade. In some cases, a downgrade of more than one or two notches is itself considered a breach. This can trigger a clause that lets investors ask for early repayment, before the bond’s original maturity date.
While this protects investors, it can put smaller issuers under pressure who must arrange funds quickly. Even if they plan to repay, failing to do so in time can lead to a payment default, a downgrade to a ‘D’ rating, and make it much harder for them to raise funds in the future. A ‘ D’ rating means an entity had defaulted on its debt.
What should bondholders do in the wake of a default?
When a default or breach occurs, investors, via the Sebi-registered trustee, can initiate a range of actions.
“These include raising the coupon rate to reflect higher risk, allowing early redemption of principal, enforcing security over pledged assets, arranging refinancing, or in severe cases, initiating insolvency proceedings under the Insolvency and Bankruptcy Code,” said Nikhil Aggarwal, group CEO of Grip Invest.
Aggarwal said, in February 2025, NBFC Criss Financial was downgraded from A to A– after breaching multiple covenants. Though interest payments continued on time, the breach triggered investor protections: a 0.25% step-up linked to the downgrade, an additional 2% for the breach, raising the coupon from 10.50% to 12.75%, and an early redemption option subject to majority bondholder approval.
The trustee Catalyst Trusteeship held a bondholder meeting on 23 June 2025, and following a majority vote, Criss repaid investors in full on 8 July 2025.