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 market.
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 ($6 billion) 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
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