Corporate Bonds and Debt Market Regulation

Author: Nishendu Kochhar, Maharishi Markandeshwar Deemed to be University

Abstract

The bond market primarily comprises two segments: government bonds and corporate bonds. Government bonds are regulated by the Reserve Bank of India (RBI) and corporate bonds are regulated by the Securities and Exchange Board of India (SEBI). The market for corporate bonds provides companies with a much-needed option for accessing funds without necessarily compromising the ownership, in other words, they are debt financing and they provide an alternative to equity financing. Corporate bonds enable companies to obtain the necessary funding to run their business without having to provide ownership in their company. Debt financing usually has a number of advantages to equity financing, mainly due to the lower cost. However, the corporate bond market in India is underdeveloped when compared to other countries. This article examines the law and the regulatory framework governing corporate bonds in India.

Keywords

Corporate Bonds, Debt Market Regulation, SEBI, Companies Act 2013, Stability, Financial, Foreign Portfolio Investors (FPI), RBI, Bond, Debt, Market,

Introduction

Corporate bonds (these are referred to as debentures in India) are securities that represent debt and are used for corporations to raise capital by borrowing money from investors. In exchange, the corporation agrees to pay fixed or variable interest payments, called coupons, on the loan for a set period of time and will return the original loan (principal) amount when the bond matures. A functional bond market helps companies secure cost-effective long-term funding. While bond markets can support capital formation and provide stability, equity markets can easily become unstable in a volatile global market; even real estate and gold markets can be shaken. However, in India, the corporate bond market has been less active in comparison to the equity markets. This article will try to address the question of why the Indian corporate debt market is stagnant and how regulations may help develop and strengthen that market.

Literature Review

Mr. Ashish Virmani identified that Corporate Debt Market (CDM) in his research article is less developed compared to equity market simply because Indian issuers generally refrain from public debt issues because of regulatory costs. Furthermore, there is not a single regulatory law that governs to smoothen the functioning of the Corporate Debt Market, instead there are multiple overlapping laws (for e.g. Companies Act 2013, SEBI Act, RBI Guideline, etc.) making it too much complicated and end up clashing each other. In his article, he recommended simplifying the laws, bringing all the regulatory laws on the same paper and lower costs like stamp duty and taxes, among others. RBI Deputy Governor, T. Rabi Sankar also highlighted that an active bond market can perform multiple functions. Besides providing borrowers an alternative to bank finance, corporate bonds can potentially reduce the cost of long term funding. Statistical data from news outlets including The Times of India shows merely ~98% of corporate bonds were privately placed, while only ~2% were accounted to public issues (of year 2021–22), a pattern reiterated in other studies.

Methodology

This paper utilizes qualitative legal research. Examining statutes and retrieving data from other pre-existing sources such as research papers, articles, case laws and other relevant materials on the area of interest. These materials provide the basic data base for this paper. It is also important to consider arguments made for and against the topic as we seek to understand the actual current circumstances whilst removing any bias from the process.

Results

Market Size has increased but is still tiny: - The report states that India's corporate bond market has grown roughly threefold over the 2015 to 2025 period from ~₹17.5 trillion in 2015 to ~₹53.6 trillion in 2025, a record to high numbers suggesting a huge change in corporate funding approaches, reflecting a growing amount of corporate borrowing. However, this is tiny compared to the equity market or global debt markets.

Issuance pattern: An unbelievable 98% of corporate debt was issued by way of private placements and not into the public market, but why? The public issues require a lot more paperwork and work around time versus private issuance. In 2021-22, only bonds issued by a public issue raised ₹11,589 crore which was about 2% of the total raised public placement at ₹588,000+ crore. Prospectus have to be descriptive, public issues require a descriptive amount of paperwork and time, they do require a trust deed and thus deterring some issuers.

Most of the corporate bonds have been issued have been held by investors such as banks, insurers, mutual funds, and pension funds. To try to address this the minimum investment required for private placements by dimensions was reduced by SEBI from ₹70 crore to ₹25 crore (SEBI’s aim was to expand the investor base). Foreign Portfolio Investors (FPIs) have also had increased improved access: On 8th May, 2025 the Reserve Bank of India (RBI) removed the short-term limit on investments from FPIs investing via the general route, which simplified the regulatory framework and gave FPIs some flexibility in managing their portfolio.

Regulatory Framework: Key legal provisions include:

Companies Act 2013: Section 71 (1) of the Companies Act 2013 permits companies to issue debentures (a form of bond) whether or not they are convertible into shares; if debentures are issued to the public, then a company must issue a trust deed to protect investors. Section 73 (1) of the Companies Act 2013 restrains acceptance or renewal of deposits (including some unlisted debentures) except in accordance with specific provisions which comply with regulatory rules.

SEBI Regulations: The SEBI introduced Issue and Listing of Debt Securities (ILDS) Regulations, 2008 (and updated them through subsequently revisions to facilitate ease of issuance of bonds), now under these bonds must be rated by a credit rating agency, disclosure documents must be performed (which is similar to a prospectus) and compliance will include requirements of listing. In recent reforms SEBI has mandated a drastic reduction of the requirement for thresholds of issuing debt securities from ₹100,000 to ₹10,000 this will encourage non-institutional investors to participate in the corporate bond market and also ease listing and disclosure requirements similar to equity markets.

Judicial Oversight: Courts will enforce statutory protections. In the decision of SEBI v. Rajkumar Nagpal (2022) the Supreme Court held that SEBI’s restructuring circular must be followed it has binding effect regardless of what the underlying contracts say as well as the dissenting debenture holders cannot be bound purely by debt compromises and attacks outside of the statute, Impact? . Additionally, in 2012, the Supreme Court in Sahara India Real Estate Corp. Ltd. v. SEBI ordered Sahara to repay over ₹20,000 crores raised provisionally through Optionally Fully Convertible Debentures (which advertised as private placements, but was realistically engaged to over 30 million investors making it a public issue), which violated securities laws to fail to issue in compliance with public issues.

Basically, the regulatory framework does two things:-

Making sure that investors are fully protected with full disclosure.
Making it easier for companies to raise funds.

Discussion

A clearer understanding of the performance and trajectory of the Indian corporate bond market can be developed through looking at recent empirical data published by the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and intermediaries in the financial markets. The numbers reflect continuing development, but also repeated gaps in this sector.

To summarize, the research finds that the corporate bond market is large and has potential but faces numerous constraints. The predominance of private placement (98%) indicates that the most efficient and least-expensive option for issuers is to use a private placement process, tapping into the investor pool that finds this route less expensive and less document burdensome than a public market deal. However, the consequence of this has been a shrinking and illiquid market that is unattractive for the ordinary investor. Regulation agencies, such as SEBI, note that the investment size is relatively small and non-useful to the market so more regulatory steps, such as the new online platforms, were introduced. Courts (for example, Nagpal, Sahara) stated it is important to protect the rights of investors and issuers so the legal issues and outcomes can be valuable to understand from a regulatory perspective.

Regional advances made by regulators globally are also exploring a more consolidated bond market but with different emphases. For example, the FCA in the UK has removed many pre-issue checks allowing listed firms to raise less capital with less complicated prospectus material for their smaller bond offerings and even allowed the companies to directly fund investors via platforms similar to crowdfunding. In contrast to that scheme, Indian regulations remain somewhat prescriptive and clearly put in place requirements for an issuers engagement with SEBI and the necessary disclosure into regulatory filings. However, it seems that there is a convergence where SEBI is beginning the rulemaking process (2024-25) to allow for some market-driven instruments and is beginning to allow foreign capital (e.g. index inclusion) flow in and relax FPI norms. It is also commencing to define a repo market for corporate bonds - although this will be in more nascent stages.

For this research the primary sources of information are the legal texts, law reports, and published secondary data; interviews and proprietary market information, which may have quantitatively added curiosities, were not included. Certain conclusions from the analysis, as always, would change on the release of new SEBI circulars, etc., because of the changing regulatory landscape. Case law was only reviewed based on reported case law from official reports; often many debt restructurings are settled privately (ICAs) or litigation outcomes administratively (NCLT), as such those actions are not in the public domain. Future empirical research may develop to hold issuer and investors accountable to measure the regulatory impacts identified.

Suggestions

We recommend that SEBI address the following issues:

Simplify Public Issuance Framework: Combine the disclosure requirements of SEBI and the Companies Act into a single document, which is simpler to read. Expedite a fast-track approval process for repeated issuers in comparable manners to the current shelf prospectus, for equity offerings. Reduce and standardize stamp duty across states even further!
Deepen Secondary Market Liquidity: Create market makers and dedicated trading venues for bonds. Create repo markets and fixed income indices to help institutionalize the investment profile of bonds. Create incentives that compel banks or mutual funds to trade bonds they hold instead of remaining in a pristine buy and hold.
Increase Retail Participation: Encourage bond ETFs and online platforms to provide a simple access point to buy bonds. Establish more programs that promote financial literacy to demonstrate that bonds are a safer asset class than equities. Advance ease of access to demat accounts and know your customer (KYC) controls for retail investors.
Reform Credit Rating Agencies: Move to an investor pay model to limit any potential control over a conflict of interest. Instruct CRA to disclose rationale for their rating and use of assumptions and stress test models when assigning ratings. Introduce penalties for excessively poor rating or delayed downgrades.
Encouraging Long-Dated Bond Issuance: Introduce tax benefits to bondholders for long-dated and/or infrastructure bonds. Widen the mandate of sovereign guarantee or additional credit enhancement for priority allocations.
Clarifying Bondholders’ Rights in IBC: Amend the Insolvency and Bankruptcy Code to formally recognize parity in secured bondholder rights with banks. Strengthen the legal authority of debenture trustees in insolvency situations.
Encouraging ESG and Green Bonds: Create tax benefits and subsidies for green and social impact bonds. Create a unified disclosure standard aligned with worldwide ESG standards for foreign capital.
Create one regulator or coordination mechanism: A regulator of the bond market, with at least a formal coordination mechanism with SEBI, RBI and the Finance Ministry to help avoid overlaps.

Conclusion

To conclude, while the corporate bond market in India has grown significantly since the early 1990s, it remains severely distorted in terms of offering type, and the development of a secondary market; primarily favoring private placements purchased by an institutional investor base. Recent Supreme Court decisions on regulation under the Companies Act and SEBI regulation, and the creation of a significant regulatory regime ensures protection. SEBI and the RBI have been gradually addressing some of the historical issues, as seen by the reduced minimum issue size, permitted electronic trading and foreign investment ease. Ongoing progressive liberalisation of issue regulation for investors (especially retail issues) must continue as well. A parallel effort is necessary to develop deeper secondary markets e.g. bond futures, repos and define better clarity in processing and agency law - via either introducing legislation that suits existing laws, and/or introduce a new corporate debt law. Pick up the interdependence of compliance with technology and improve the trustee relationship to increase comfort and confidence in investment and with compliance. Future research should consider the implications of the reforms and legislation not only on behavior, but on the depth of the market and conduct comparative lessons from elsewhere that may facilitate regulatory improvements to debt markets in India