August 29, 2016

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Stage Set For Robust Corporate Bond Market In India

- Jyoti Singh, Partner [ Phoenix Legal ]
- Srisabarirajan, Principal Associate [ Phoenix Legal ]


Recent Developments In India’s legal regime coupled with existing stress in the banking sector and regulatory overhaul has already marked 2016 as a defining year for the corporate bond market and it is equally crucial for the corporate bond market to deepen in the existing environment...

Despite growth of corporate bond markets in India being a focus for the last few years, the desired results have not been achieved as yet. However, recent developments in India’s legal regime coupled with other factors, including existing stress in the banking sector, especially public sector banks and the regulatory overhaul has marked this year as a defining year for the corporate bond market. While the government is doing everything to make the corporate bond market both investor and issuer friendly, it is crucial that it deepens in the prevailing environment.

Deeper Corporate Bond Market - Why crucial?

India’s financial system, being a bank dominated system, is presently facing certain peculiar constraints, as there is tremendous stress on the banking sector, more so on public sector banks, to raise monies due to surfeit of nonperforming assets (NPAs) and on the other hand; there is a surge in the requirement for funds in various sectors for economic growth.

To put it in perspective, according to a recent press release of CRISIL, a S&P global company, it is expected that India will need about USD 650 billion for infrastructure sector alone, build-over five fiscals to 2020. From the public sector banks’ standpoint, they need to raise about USD 25 billion of Tier I Capital by March 31, 2019, to conform to the Basel III regulations1.

Given the present constraints public sector banks are facing in raising funds, it is of the utmost importance for India’s financial system to bring a better balance between market-based and bank-based finance and to have a deeper corporate bond market.

Serious Measures to Improve Corporate Bond Market

In order to bring a better balance between market-based and bank-based finance and improve the corporate bond market, taking into account the recommendations made by various expert committees, several regulatory measures have been taken recently by the incumbent Government.

Further, as decided in a meeting of the Financial Stability and Development Council Sub-Committee (FSDC-SC) held in September 2015, a ‘Working Group on Corporate Bonds’ has also been constituted with representation from the Ministry of Finance, Government of India, and financial sector regulators (RBI, SEBI, IRDAI and PFRDA) to facilitate a time-bound implementation of specific measures for development of the corporate bond market2.

Developments in Legal Regime

Recent developments in India’s legal regime, which were brought to improve the ease of doing of business in India, have equally strengthened the case for a deeper corporate bond market. Two of such major developments in the legal regime that are expected to have positive effects on the corporate bond market are as under:

  1. Insolvency & Bankruptcy Code, 2016
  2. Remedies under the Companies Act, 2013
1) Insolvency & Bankruptcy Code, 2016

A robust and effective bankruptcy regime is a pre-requisite for development of corporate debt market from investors’ point of view. However, the existing framework on insolvency and bankruptcy laws, is embodied in multiple legislations and is multi-layered, resulting in a highly fragmented system and leading to complex issues on how various statutes were reconciled with one another.

Further, the existing framework for insolvency is a time-consuming and cumbersome process. As per data available, resolving insolvency proceedings in India takes approximately 4.3 years on an average; whereas, it takes 6 months in Japan, 8 months in Singapore, one year in Malaysia and UK, and 1.5 years in USA3.

In order to resolve this serious issue, the incumbent government recently enacted the Insolvency and Bankruptcy Code, 2016 (Bankruptcy Code), which essentially consolidates the existing legal regime dealing with insolvency and bankruptcy proceedings in India. Some of the prominent features of the Bankruptcy Code are:

  • Timebound insolvency resolution process (IRP), enabling a creditor to recover debts in an expeditious manner by either restructuring debt or liquidating the insolvent debtor. IRP will have to be completed within 180 days, extendable by maximum period of 90 days.
  • Leaves business decisions to a committee of creditors’ and allows the adjudicating authority to deal only with procedural issues.
  • Keeps the Government’s debt lower in priority to unsecured creditors.
  • Takes away the powers of civil courts to deal with bankruptcy - making the process both cost and time efficient.

IRP, under the Bankruptcy Code, can be initiated by: (a) financial creditor, (b) operational creditor, and (c) the corporate debtor itself. The term ‘financial creditor’ is defined under the Bankruptcy Code as any person to whom the ‘financial debt’ is owed and in turn, ‘financial debt’ includes any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.

Though the provisions are yet to be notified, the enactment of the Bankruptcy Code by itself has created a positive outlook about the bond market in India, as this will give strength to bond holders to initiate insolvency resolution process in an effective manner.

2) Remedies before the National Company Law Tribunal under the Companies Act, 2013

Recently, on June 1, 2016, Ministry of Corporate Affairs, by way of a notification, constituted National Company Law Board (NCLT) and its benches, which will be the adjudicating authority for the disputes arising from the Companies Act, 2013 as well as the Bankruptcy Code. While constituting the NCLT, it also notified various sections of the Companies Act, 2013 that involve adjudication by NCLT.

Out of various provisions that were notified on June 1, 2016, Sub-sections (9) to (11) of Section 71 of the Companies Act, 2013 provide for distinct rights to debenture holders and debenture trustees to file recovery proceedings before NCLT, which are otherwise not available for any other creditor under the Companies Act, 2013. Such distinct rights that are available to the debenture holders/trustee are as under:

  • Insufficient assets in the Company - If, at any time, the debenture trustee comes to a conclusion that the assets of the company are insufficient or are likely to become insufficient to discharge the principal amount as and when it becomes due, the debenture trustee may file a petition before the NCLT.

    After hearing such a petition, NCLT may, by order, impose such restrictions on the incurring of any further liabilities by the company as NCLT may consider necessary in the interests of debenture-holders.

  • Failure to redeem debentures - Where a company fails to redeem debentures on the date of their maturity or fails to pay interest on the debentures when it is due, NCLT may, on the application of any or all of the debenture-holders, or debenture trustee and, after hearing the parties concerned, direct, by order, the company to redeem the debentures forthwith on payment of principal and interest due thereon.

    If any default is made in complying with the order of the Tribunal under this section, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with a fine which shall not be less than two lakh rupees but which may extend to five lakh rupees, or with both.

  • Speedy disposal - If an application made by a debenture holder/trustee against a company for failure to redeem debentures, under the NCLT Rules (which are yet to be notified), such an application will have to be decided within sixty days from the date of receipt of the application, subject to giving reasonable opportunity of being heard to the company and other persons interested in the matter.

The remedies available under the Companies Act, 2013, necessarily for recovery and restrictions against the company combined with the remedies available under the Bankruptcy Code for expeditious IRP will create a conducive environment for investors in the corporate bond market.

Key Points

Debenture Trustee’s authority to initiate proceedings under the Bankruptcy Code, 2016

The existing provisions for winding up of a company (under the Companies Act, 1956), in no uncertain terms, provide that the holder of any debentures and the trustee for the holders of debentures shall be treated as creditors, and hence, can present a petition for winding up of a company. However, the Bankruptcy Code does not specifically entitle the trustee of bonds/debentures to initiate insolvency resolution process.

As stated above, under the Bankruptcy Code, the insolvency resolution process can be initiated by financial creditor, operational creditor or the corporate debtor itself. While the term ‘financial creditor’ includes debenture/bondholder; there is no specific provision that entitles the trustee to initiate IRP. Though there is a lack of clarity in the Bankruptcy Code, keeping in mind various precedents from the courts on the trustee’s authority to initiate winding up proceedings on behalf of the holders under the existing regime, courts are likely to interpret the term ‘financial creditor’ to include a trustee of the holders as well.

NCLT v. Civil Courts

As per Section 430 of the Companies Act, 2013 (which has been notified on June 1, 2016), no civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the NCLT is empowered to determine and no injunction shall be granted by any other court or other authority in respect of any action taken or to be taken in pursuance of any power conferred on NCLT.

This will essentially mean that, for the purpose of seeking recovery of debentures that remained unpaid on maturity date or to seek restrictions against the company for insufficiency of assets, a debenture holder/trustee can only seek remedies before the NCLT under the Companies Act, 2013 but not before civil courts.


Though the corporate bonds investors may remain cautious and wait to see how recent measures undertaken by the government will play out in the market practically, these measures, more particularly in the legal regime, will go a long way in creating a healthy and conducive environment for corporate bond investors. Likewise, given the financial restraints being faced by public sector banks, time is ripe for India to find a better balance between bank-based and market-based finance, and to have a deeper corporate bond market.

1 Press release, “Deeper corporate bond market has become crucial to economic growth, says CRISIL”, May 31, 2016, CRISIL, available at https://www.crisil. com/bond-market/pdf/deeper-corporate-bond-market-has-become-crucial.pdf (last accessed on July 5, 2016 at 10:15 am IST).
2 Chapter III, “Financial Sector Regulation”, Financial Stability Report - June 2016, Reserve Bank of India, June 28, 2016, available at aspx?UrlPage=&ID=849 (last accessed on July 5, 2016 at 10:15 am IST).
3 Resolving Insolvency, Doing Business, World Bank Group, available at http://www. (last accessed on July 5, 2016 at 10:15 am IST).

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.

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