When Indian Bonds Went Wrong: IL&FS, DHFL, Franklin and the Lessons Priced in Blood
Nothing teaches bond investing like the times it failed. India’s 2018–2021 credit cycle produced a full syllabus — AAA names defaulting, “safe” funds freezing, bank bonds vaporising while equity survived. If you invest in anything beyond sovereigns, this history is your risk disclosure. Read it once properly.
IL&FS (September 2018): the AAA that wasn’t
Infrastructure Leasing & Financial Services — a systemically-woven infra lender with 300+ group entities — defaulted on obligations against ₹90,000+ crore of group debt, weeks after carrying top-grade ratings. The default froze money markets, triggered the NBFC funding crisis, and forced a government-appointed board. Resolution has run for years, with recoveries varying wildly by entity and seniority.
Lessons: ratings lag reality — catastrophically, when disclosure is poor; complex group structures can hide where the money actually sits; and “systemically important” describes contagion potential, not safety.
DHFL (2019): housing finance, AAA to D inside a year
Dewan Housing, a top-3 housing financier, went from AAA in 2018 to default in mid-2019 amid funding freeze and fraud findings. It became India’s first large financial company resolved under IBC; Piramal acquired it in 2021. Retail NCD holders — tens of thousands of them — recovered roughly a quarter to half depending on category and timing, after two years of process.
Lessons: retail-friendly public NCDs are not retail-safe by construction — the issuer’s balance sheet is everything; “secured” recovers something, eventually, not everything, immediately; and a 9.x% coupon from a lender whose own borrowing costs are spiking is the market warning you in plain sight.
Yes Bank AT1 (March 2020): the bonds junior to equity
₹8,415 crore of Additional Tier 1 bonds written to zero in the RBI-led rescue — while equity holders kept their (diluted) shares. Sold widely to retail as “better FDs.” Litigation reached the Supreme Court, where judgment was reserved in February 2026 and remains pending.
Lessons: instrument structure can dominate issuer quality; regulatory capital exists to absorb losses — yours; and any pitch translating a complex instrument as “like an FD” is the moment to leave.
Franklin Templeton (April 2020): when the fund is the risk
Franklin wound up six debt schemes holding ₹25,000+ crore — not because everything in them defaulted, but because the funds held illiquid lower-grade paper against daily-redemption promises, and COVID redemptions broke the match. Investors eventually received essentially all of it back through court-supervised distributions over several years — but “eventually” meant frozen money and zero certainty at the time.
Lessons: a fund’s liquidity promise is only as good as its portfolio’s liquidity; yield-topping debt funds are yield-topping for a reason; and diversification across schemes isn’t diversification if they share the same style.
The supporting cast
SREI (2021) — twin infra lenders to insolvency; Reliance Capital/ADAG (2019–21) — group unwinding defaults; Amtek Auto (2015) — the earlier warning nobody generalised; assorted co-operative bank failures — where DICGC’s ₹5 lakh proved to be the only floor that held.
What the history actually teaches
- Position sizing is the only defence that always works. Every episode punished concentration hardest. The 5%-per-issuer cap isn’t conservatism — it’s the empirical lesson of 2018–21.
- Credit risk arrives suddenly after accumulating slowly. These issuers deteriorated for years while yields politely widened; the default itself took days. Watching spreads beats watching ratings.
- Recovery is slow even when it comes. DHFL took ~2 years, Franklin 1–4, IL&FS is measured in half-decades, Yes AT1 is in year six of litigation. Money you may need has no business earning credit spread.
- The sovereign core exists for a reason. Through every episode above, G-secs, SDLs and T-bills paid on time, every time. The 150–300 bps that corporate paper offers over them is the entire insurance premium for everything on this page.
- Panic is expensive; preparation is cheap. Franklin’s investors who sold
side-pocket units at panic discounts lost real money on paper that
ultimately paid. The alternative to panic isn’t courage — it’s sizing (rule
- that makes panic unnecessary.
FAQ
Has a G-sec or SDL ever defaulted? No missed payments in the modern era — the SDL mechanics explain why the state record has held.
Did rating agencies get punished? SEBI tightened norms (rating-action timelines, liquidity disclosures, withdrawal rules). Structural incentives — issuer pays — remain.
Is the system safer now? Meaningfully: SEBI’s fund liquidity buffers and side-pocketing rules, NBFC regulation post-IL&FS, the OBPP framework for retail bond sales. Safer plumbing, same physics — credit risk didn’t retire, it re-priced.
Educational content, not investment advice. Tax rules current for FY 2026-27 to the best of our knowledge — verify with a professional before acting. See the full disclaimer.