What is a Recovery Expense Fund? SEBI REF rules

A recovery expense fund is the money that pays the lawyers when a bond goes bad. If a listed debt issuer defaults, someone has to fund the enforcement action, and SEBI decided that someone should not be the debenture trustee out of its own pocket. So the issuer pre funds it at listing, and a stock exchange holds it. This guide covers how the recovery expense fund is sized, where it sits, what releases it, and what happens to the balance. It is not investment advice.

How is a recovery expense fund calculated?

The recovery expense fund is 0.01% of the issue size, subject to a maximum of Rs 25 lakh per issuer. That is paragraph 1.1 of Chapter IV of SEBI's Master Circular for Debenture Trustees, SEBI/HO/DDHS-PoD-1/P/CIR/2025/117 dated August 13, 2025. The issuer deposits it with the designated stock exchange, which it identifies and discloses in its offer document.

Read the cap carefully, because it is the part people get wrong. It is per issuer, not per issue. An issuer with many listed debt issues does not deposit Rs 25 lakh against each one. The ceiling on the whole relationship is Rs 25 lakh, which means the fund available to enforce a large issue can be a very small fraction of the amount outstanding.

What form does the fund take?

The issuer deposits cash or cash equivalents including bank guarantees, at the time of making the application for listing of the debt securities. The two forms then behave differently.

If the issuer deposits cash, the designated stock exchange invests it in government securities, treasury bills, fixed deposits with a scheduled commercial bank, or gilt or overnight mutual fund schemes. Income and interest earned is added to that issuer's fund rather than kept by the exchange.

If the issuer provides a bank guarantee, three timing rules apply:

That last row is the enforcement mechanism. A lapsed guarantee does not quietly leave the fund empty, because the exchange converts it to cash instead.

There is also a corporate action check. Where the status of the issuer changes because of restructuring by way of a scheme of arrangement or similar, the designated stock exchange must confirm the fund is still maintained at the required level before it issues a no objection letter for that restructuring.

When does the Recovery Expense Fund actually pay out?

On a default, and only through a consent step. Under paragraph 2.1 of Chapter IV, the debenture trustee or lead debenture trustee obtains the consent of holders of debt securities for enforcement or legal proceedings, then informs the designated stock exchange. The exchange releases the amount lying in the fund within five working days of receiving that intimation.

The chapter defines a lead debenture trustee two ways for this purpose. It is either a debenture trustee chosen as lead by the other debenture trustees, or a debenture trustee representing holders of more than 50% of the outstanding value of the debt securities. Either route qualifies.

Once released, the trustee must keep a proper account of everything spent out of the fund, including legal expenses and the cost of hosting meetings connected to the enforcement or legal proceedings.

SEBI also codified the consent requirement in the regulations themselves, after this master circular was published. The SEBI (Debenture Trustees) (Amendment) Regulations, 2025, effective October 27, 2025, inserted Regulation 15A, which lists rights a debenture trustee may exercise. Sub regulation 15A(3) provides that a debenture trustee may utilise the Recovery Expense Fund with the consent of the debenture holders, in the manner specified by the Board. The consent condition now sits in the parent regulations and not only in the circular.

How is the balance refunded?

The balance is refunded to the issuer when holders of the debt securities are repaid at maturity, or at the time a call or put option is exercised. It is not automatic. The designated stock exchange needs a no objection certificate from the debenture trustee first.

Before issuing that certificate, the debenture trustee must satisfy itself that there is no default on any other listed debt security of that issuer. Because the fund is capped per issuer rather than per issue, one clean maturity does not release the money if something else in the same issuer's stack is in default.

How is the fund verified, and where can you see it?

SEBI does not let the debenture trustee take the issuer's word for it. Under paragraph 4.1, the trustee must take written confirmation from the designated stock exchange or another independent source that the issuer created the fund, and shall not rely solely on the issuer's communication.

For anyone outside the transaction, paragraph 4.2 is the useful one. Stock exchanges disclose the amounts of recovery expense funds created by issuers on their websites on a half yearly basis, and that disclosure includes the debenture trustee details for the debt securities.

One naming quirk to know when searching. The chapter heading reads "Recovery Expenses Fund" while the text inside it reads "Recovery Expense Fund". Both spellings refer to the same fund, and exchange disclosures use them interchangeably.

Where the recovery expense fund sits in the wider framework

The fund is one piece of the protection stack around a listed bond. The terms it enforces live in the debenture trust deed, the asset backing is evidenced in a security cover certificate, and the covenant tripwires that would trigger enforcement are described in what happens when a bond covenant is breached. Annex VIA of the same master circular lists the Recovery Expense Fund among the accounts and reserves that a trust deed's covenants can be written against.

A recovery expense fund is a procedural fund for running an enforcement, not a credit cushion or a guarantee of recovery. Flock reports what issuers and trustees disclose, with the source and the date attached. It is not investment advice.