* Revamp of Companies Act complicates bond issuance
* Issuers now deposit half of the principal before maturity
* New deals stop as bankers assess cost of new rules
By Manju Dalal
SINGAPORE, April 25 (IFR) - Provisions in India's new
Companies Act requiring corporate borrowers to set aside half of
bond proceeds have made the sale of such securities costlier and
have brought the local market to a halt.
Under Section 71 of the legislation, which took effect this
month, corporate bond issuers have to create a debenture
redemption reserve equivalent to at least 50% of a planned bond
sale before the maturity of the security.
The rule doubles an earlier 25% debenture redemption reserve
and expands it to include private bonds, those with 49 or fewer
investors. The previous rule, under the old Companies Act,
addressed public bonds only, a much smaller part of the local
On top of that, the company has to set aside 15% of its
total maturities for the following fiscal year by the end of the
current fiscal year.
Among other things, the regulation seeks to address recent
defaults plaguing India's retail investors. However, market
participants say the guidelines fail to account for the
different credit qualities of borrowers in the Indian market.
"The [debenture redemption reserve] enforcement has its
genesis in the notorious bond sales to retail investors of some
companies that regulators are probing," said a Delhi-based
source at a frequent issuer. "The lawmakers cannot create
specific rules for these defaulters. So, now, everyone has to
bear the brunt of their wrongdoing."
One of the bigger defaults came from companies belonging to
the Sahara Group, which raised millions of dollars from retail
investors. The Supreme Court of India said recently that the
group owes Rs370bn (US$6bn) to small investors. Subrata Roy, the
head of the group, has been in jail since early March.
LACK OF CLARITY
In addition to expanding the reserve requirement, the act
may also expand the number of securities that the debenture
redemption reserve affects. Market participants have said they
are not sure what qualifies as a debenture, because the
regulator has expanded that term to include "any other
securities" of a company.
"The definition of the debenture is kept open-ended and we
don't know if that also now includes commercial paper," said a
Mumbai-based official of a non-banking financial corporation.
"If that is the case, then all the rules, including the
debenture redemption reserve, will be applicable to comercial
paper issuance as well."
Issuers are still waiting for the Ministry of Corporate of
Affairs to clarify which securities qualify as debentures.
Setting aside so much capital might put an unnecessary
strain on liquidity, especially because the new act may affect
several types of debt.
"We can still live with the 15% retention requirement, but
extending debenture redemption reserve [to include] sub debt and
perpetual bonds is just absurd," said an official at a non
banking financial corporation.
Certain procedural changes may also make life harder for
Under the previous legislation, companies used to get
blanket approval from shareholders to issue bonds and such
permissions were valid for two to three years. The new rules
require borrowers to get shareholder permission every year.
Issuers are, so far, uncertain how this new procedure will
change the way they raise funds.
"We are consulting our legal department and will make a
decision on the current year's borrowing plans once these small
details are clear," said an official at a state-run non-banking
That is not the only thing that needs clarifying. The act
states that the redemption reserve has to be created out of
company profits and the debenture redemption reserve should be
in place before the debenture redemption commences. Yet, it does
not provide details on how a loss-making issuer will be able to
set aside the funds if there are no profits.
"The government should also clarify the situation when a
bond issuer becomes loss-making and this happens before the full
debenture redemption reserve requirement comes into force," said
an official at a non-banking financial corporation. "How would
this situation be resolved?" he asked.
Some market participants pointed to another troubling
detail. The act has different rules for listed and unlisted
An entity used to be considered listed only if its equity
was on a stock exchange, but, according to the new act, a
company with any securities on an exchange is considered a
"Most of my bonds are listed, but my equity is not. So, am I
a listed entity from April 1?" asked an executive. "We can live
with any rules and tweak our borrowing plans according, but only
when we know what rules will stay and what will change."
It is not clear if the companies will get an answer soon,
even though top borrowers have meetings planned with the
Ministry of Corporate Affairs in a few days, sources say.
General elections are on in the country until May 12 and any
important government decision will be made only after the
results are released on May 16.
(Reporting By Manju Dalal; editing by Timothy Sifert and