BluSmart To PharmEasy: Why Covenant Breaches Matter In India’s Debt Market
KEY TAKEAWAYS
This blog explains the concept of covenants in debt agreements, which are specific conditions set between borrowers and lenders to protect investments.
Covenant breaches occur when borrowers fail to meet these conditions, potentially leading to accelerated debt repayment demand and signaling financial issues.
Recent examples of covenant breaches in India include companies like BluSmart, PharmEasy, Spandana Sphoorthy and many others highlighting the financial challenges they face.
The consequences of covenant breaches can include penalties, accelerated repayment demand, credit rating downgrades, and legal actions, emphasizing the importance of financial discipline.
The blog also emphasizes on the importance of understanding and adhering to covenants for maintaining financial stability and trust factor in India's evolving debt market.
Have you ever taken a car loan from any bank or NBFC? If yes, then I am pretty sure you might have missed out on the fine print of the loan agreement. Well, what if you that car loan you took had some ‘covenants’ mentioned in the loan agreement, like you cannot take another loan on the same vehicle during the loan period without the bank’s permission, or that you can not leave India for employment or business or a long stay without first fully repaying the car loan’s outstanding dues.
If you still go on to take another loan on the same car during the tenure or shift abroad permanently without paying your outstanding dues, all this can be considered a covenant breach on your part, by the bank.
So, what exactly is a covenant? And what are covenant breaches? Well, let us simplify it for you and explain the importance of covenants in debt agreements like a loan or bond.
What Is A Covenant?
Simply put, covenants are like a series of small and independent rules/promises inside formal agreements made between a debtor (borrower) and a creditor (lender). Covenants expressly outline behaviors that a borrower must or must not engage in, during the period of loan or debt agreement. So basically, if you are a bond investor, a covenant gives you the power to protect your investments through various actions. We will dig into this aspect as this blog goes on.
What Are Covenant Breaches?
When a borrower violates any of the covenants, it is termed as a covenant breach. A covenant breach occurs generally when a party, which can be a borrower, fails to uphold a promise or obligation outlined in a legal agreement. These covenants, which can be affirmative (to do something) or negative (to not do something), primarily aim to protect lenders (like in BluSmart’s case it is the bond investors).
When a covenant breach occurs, it can trigger accelerated repayment of the debt and may signal deeper financial issues, similar to what has been happening in the case of BluSmart.
List Of Some Recent Covenant Breaches In India
From BluSmart, PharmEasy to Mannapuram's subsidiary Asirvad Microfinance, many companies have breached covenants in the recent past itself.
Let's have a brief look at what had happened in these case of covenant breaches:
BluSmart - April 2025
Earlier this year, the entire BluSmart saga had rattled India’s startup ecosystem and exposed regulatory gaps as well, right? The EV ride-sharing startup, which had been giving a tough competition to the otherwise market leaders Uber and Ola, has bitten the dust.
The EV firm had breached multiple covenants this year, with the key ones being these:
Default on NCD payments: BluSmart issued non-convertible debentures (NCDs) via a lender, and missed payments due on March 31, 2025 (Rs 64.17 lakh) and April 30, 2025 (Rs 63.31 lakh). The total default amount is ~Rs 1.28 crore. These were installment payments under a principal repayment schedule. Not meeting these was a breach of the debt covenant.
Cross-default clauses triggered: Because of the missed NCD payments, the “cross-default” clause was triggered by the debenture trustee, which means BluSmart may have been considered in default of multiple obligations, not just the specific NCDs.
Leasing / asset‐use defaults: BluSmart (along with Gensol) was restrained by Delhi High Court from creating third-party rights over EVs leased via companies like Clime Finance. The leases included rental obligations (lease payments) which BluSmart allegedly defaulted on (March 2025 onwards).
PharmEasy-June 2023
In June 2023, one of India’s leading online pharmacy platforms, PharmEasy, had breached its loan covenant terms after failing to raise equity. This came just within a year of raising high-cost debt from US banking giant Goldman Sachs.
As per a report, the terms of the covenant agreement allowed Goldman Sachs to potentially take over the entire company or its most profitable arm Thyrocare on account of the breach, as all the assets of PharmEasy’s parent API Holdings had at that time been used as security for the loan.
PharmEasy had reportedly borrowed Rs 2,280 crore, from Goldman Sachs in August 2022 to pay off an earlier debt it had incurred from Kotak Mahindra Bank for buying Thyrocare. It was a 5-year loan attracting 17-18% annual interest rate.
The pharmacy platform had hoped to pay off Rs 2,000 crore of its debt from the proposed IPO proceeds of Rs 6,250 crore. But not only did Pharmeasy’s IPO plans keep seeing multiple delays, it even failed to raise equity of around Rs 1,000 crore, linked to its burn rate velocity. This became a covenant breach by Pharmeasy, on Goldman Sachs’ loan.
Spandana Sphoorty Financial- January 2025
Earlier this year in January, Spandana Sphoorty, a rural-focused NBFC, had suffered a net loss for the second consecutive quarter, and also missed the minimum 75% qualifying assets criteria. The company had thus breached certain covenants related to portfolio risks, non-performing loans, tangible net worth, and quarterly profitability.
- Consequently, in February 2025, CARE Ratings downgraded the rating of Spandana Sphoorty Financial Ltd’ from A+ to A-. Moreover, as recently as on April 23rd, Spandana’s MD & CEO Shalabh Saxena resigned with immediate effect from the loss-making NBFC amid the financial stress.
Kinara Capital-February 2025
Just a couple of months ago, MSME lender Kinara Capital was stuck with Rs 1,772 crore in breach of financial covenants related to its borrowings. As per a Moneycontrol report, Kinara had breached certain financial covenants, primarily due to elevated GNPAs and profitability.
Rising interest rates since last year have weakened borrowers’ repayment capacities, leading to higher delinquencies and an overall stress in the NBFC sector. Kinara Capital’s financial disclosures had indicated that the covenant breach was due to rise in delinquencies and higher-than-average leverage within certain customer segments.
While the company, which has till date disbursed MSME loans worth more than Rs 8,000 crore, has reportedly ensured that it has not defaulted on any payments to lenders yet, it remains to be seen for how long they can avoid that amid the overall NBFC sector’s financial stress, particularly in the unsecured MSME lending segment.
Asirvad Micro Finance-February 2025
Besides Kinara Capital, Asirvad Micro Finance, which is a subsidiary of one of India’s leading gold loan players Manappuram Finance, too had breached financial covenants in respect of its borrowings after suffering loss in the third quarter of FY 2024-25.
Asirvad had reportedly written-off loans to the tune of Rs 400 crore during the Oct-Dec quarter, which led to higher credit costs and a loss for the quarter that ended December 31, 2024.
Mannapuram’s regulatory stock filing had mentioned that Asirvad was non-compliant with certain covenants after consecutive quarterly losses and significant loan write-offs.
Example Of Covenants In An Agreement
Axis Bank’s Car Loan Cum Hypothecation Agreement
Navi Finserv’s Bond Deal At Grip Invest
IFL Samasta’s Bond Deal At Wint Wealth
What Happens After A Covenant Breach?
If a covenant is breached, suppose in case of bond, it is considered as an event of default.
This allows the imposition of penalties, acceleration of immediate repayment, termination of bond agreement, credit rating downgrade, and even legal action taken by bond holders against the bond issuer. Any of such consequences can be faced by the issuers when they breach one or more covenants.
Conclusion
In conclusion, we all can agree that covenants play a crucial role in debt agreements like bonds or loans, by setting clear expectations and obligations for borrowers, thereby protecting the interests of lenders.
Covenant breaches, as seen in recent cases like BluSmart or PharmEasy, can have significant repercussions, including accelerated repayment demands, credit rating downgrades, and potential legal actions. These breaches highlight the importance of maintaining financial discipline and transparency in the debt market. As India's debt market continues to evolve, understanding and adhering to covenants will remain vital for both borrowers and lenders to ensure financial stability and trust, right? That is exactly why we wrote this blog to help you understand this ‘lesser-known’ but important concept of covenant breaches in India’s debt market.
Please note that this is an opinion blog and not an official research or investment advice This blog aims to help retail investors make an informed decision in the debt market, and neither encourages nor discourages you from investing in any particular platform or any other asset class.
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