Debt Without Depth: Legal Design, Regulatory Fragmentation, and Enforcement Gaps

I. Introduction

The Indian financial structure has traditionally been biased in favour of bank-based credit, a structure that is becoming less consistent with the needs of long-term capital formation in a contemporary economy. Under-utilisation of the corporate bond market, which is still shallow and lacks a diverse range of investor participation, is a regulatory consequence of this structural imbalance. It is in the view of this structural inadequacy that the 2025 report by NITI Aayog, Deepening the Corporate Bond Market in India (“Report”), is a landmark policy initiative that warrants a more thorough legal analysis of the securities and financial regulatory landscape in India.

The Securities and Exchange Board of India (“SEBI”) has the mandate to guard investor interests under the SEBI Act, 1992 and regulate securities markets under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 are aimed at facilitating corporate debt issuance. However, market depth has been hampered by the still prevailing predisposition of private placements under Section 42 of the Companies Act, 2013 as well as the high level of disclosure and compliance asymmetries between equity and debt. Besides, the same regulatory supervision by SEBI, the Reserve Bank of India (“RBI”), and the Ministry of Corporate Affairs has led to fragmented supervision, a factor that the Supreme Court of India (“SC”) has also cautioned in RBI v. Peerless General Finance about the ambiguity of regulations in financial governance. It is against this background that the proposal by NITI Aayog to expand the corporate bond market to 100-120 lakh crore by 2030 raises fundamental concerns about whether the current statutory framework can support a mature, liquid, and inclusive debt market.

This blog delves into the intricacies of the Report in three major parts. First, the piece analyses the major tenets of the Report. Second, it highlights the shortcomings and challenges of the report . Third, the article also puts forth plausible solutions to resolve these challenges and hurdles. The blog concludes with a probable way forward to resolve the roadblocks.

II. Capital Without Liquidity: The Silent Crisis in India's Corporate Debt Market

India’s capital market has witnessed asymmetric growth, with the equity market far outpacing the corporate bond market. India’s equity market capitalisation stands at more than 5 trillion dollars, while the outstanding corporate bond market remains significantly smaller, at approximately 627 billion dollars (“NISM, 2025 ”). Corporate bonds, defined as debt instruments issued by a corporation, both private and public, are a means to raise capital. The issuance of corporate bonds in India operates in a dual regulatory paradigm that seeks to facilitate capital formation while also safeguarding the investor’s interests. Historically, the Indian corporate bond market was governed by statutes, including the Companies Act, 2013, and SEBI (Issue and Listing of Debt Securities) Regulations, 2008. The enactment of the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations in 2021 marks a paradigm shift in the landscape of corporate bond issuance.

The private placement under Section 42 of the Companies Act, 2013, allows companies to offer debt securities to a “selected group” of investors, up to 200 as per the sub-section 2 of section 42 of the companies act with rule 14 (2) (b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, via a prescribed private offer. The public issuance of Non-Convertible Debentures (“NCDs”) is governed by the SEBI’s Issue and Listing of Non-Convertible Securities Regulations, 2021. Under these regulations, the issuer is required to submit an SEBI-approved offer document and secure an in-principle approval from a stock exchange prior to public issuance of the corporate bond.

While the corporate bond market has expanded, it still remains characterised by structural imbalances, particularly with nearly 98% reliance on private placements and a persistent lack of secondary market liquidity, reflecting the regulatory and disclosure burden of the public issue, which deters the issuers. As a result, the majority of debt is issued through privately negotiated issues to banks and mutual funds. Therefore, the retail investors have minimal access to corporate bonds.

III. Designed for Issuance, Not Liquidity: India's Corporate Bond Market, Legal Blind Spots and Plausible Solutions

The Indian corporate bond market has its high-level legal and institutional weaknesses that do not allow the Indian corporate bond market to develop into a full-fledged tool of long-term capital formation. The structural weakness lies in the over-reliance on Section 42 of the Companies Act, 2013, which has significantly constrained the public bond issuance process. What was intended to be a very strictly focused exception to enable effective capital raising, has in reality, become the vehicle of debt issuance, with almost all the corporate bond issuances in India being covered. Such a bias of a private placement has created a narrow base of investors, poor price discovery and a wretched secondary market, thus, contradicting the very purpose of the securities regulation: transparency and liquidity. The case of Sahara India Real Estate Corporation Ltd. v. SEBI, 2012 was categorical that the label of private placememt cannot be applied to seek a way out to the substantive disclosure requirement in cases where the funds is raised from a broad segment of public . However, the current regulatory frameworks disincentivise by subjecting publicly issued debt to unreasonable compliance expenses, and privately issued bonds to be undertaken with comparatively lenient disclosure requirements.

The remedy to this bias cannot be found in the watering down of investor protection standards but rather in a legal restructuring of disclosure standards to indicate the specific risk profile of debt instruments. SEBI has been given the power under Sections 11 and 30 of the SEBI Act, 1992 to design differentiated regulatory regimes in accordance with market imperatives. This statutory mandate enables SEBI to differentiate regulatory treatment depending on the nature of the issuance and the profile of investors involved. A disclosure regime specific to debt, based on ongoing disclosure, transparency of covenant, constant monitoring on credit rating, and trustee supervision, would maintain protection of the investors and would substantially lessen the issuance friction. The proportional regulation is endorsed by the judiciary as far back as SEBI v. Ajay Agarwal, wherein the SC appreciated the fact that the regulatory action should be context sensitive and in relation to the mischief that needs to be corrected. An approved system of fast-track issuance of public bonds in the SEBI (Issue and Listing of Non- Convertible Securities) Regulations, 2021, would encourage the issuers to shift to the alternative of public issue without affecting market integrity, which would restore the balance in the issuance ecosystem.

The second significant hindrance is the lack of consistency in the regulatory oversight of corporate bonds, which is a result of the overlapping jurisdictional requirements of SEBI, the RBI and the Ministry of Corporate Affairs. Corporate bonds are involved in a complicated legal landscape between the securities regulation, and corporate governance. This lack of standardised system of supervision has led to regulatory disjunction, overlapping compliance, and uncertainty of enforcement. This fragmentation undermines the market confidence and stimulates regulatory arbitrage, especially in those areas related to credit enhancement structure, bond defaults, as well as exposure principles of regulated financial institutions. In RBI v. Peerless General Finance and Investment Co Ltd., the SC warned that the lack of clarity in the regulatory powers has an adverse impact on financial regulation and the watering down of accountability. This judicial warning still permits the corporate debt market of India to be regulated in silo, and no single institution has the authority to provide systemic coherence.

An effective legal response needs institutionalised regulatory coordination as opposed to the ad-hoc inter-agency consultation. It would be harmonised by a statutory Corporate Debt Coordination Council assembled under the executive action of the backing of both the SEBI Act, 1992 (Section 11(1)) and RBI Act, 1934 (Section 45L) that would provide binding harmonisation of the regulatory standards without disrupting the functional autonomy. While executive coordination under existing statutory powers may suffice, a legislative amendment would offer stronger institutional legitimacy. Such organised Regulation is justified by the legitimacy in the case of Clariant International Ltd. v. SEBI, in which the SC emphasised the need to have certainty and predictability in capital markets in terms of regulation. This would enhance regulative specialisation by ensuring that the supervisory fragmentation is eliminated by the body by requiring them to converge on disclosure standards, enforcement procedures and default resolution models, and enhances institutional credibility and market stability.

The third and most structurally corrosive difficulty is the legal enforcement framework, which fails to provide effective framework against corporate bond defaults, especially the ineffective operation of debenture trustees. In theory, the Insolvency and Bankruptcy Code, 2016 has rationalised the rights of creditors, but bondholders, in particular dispersed non-institutional investors, are still subordinated in practice because of inefficiency in enforcement, procedural obscurity and inertia of trustees. Debenture trustees, when entrusted with such a duty, are often deficient in the statutory explicitness and economic motivation that they require to take decisive action in the face of distress leading to loss of investor confidence and a lack of retail participation. In IDBI Trusteeship Services Ltd. v. Hubtown Ltd., despite the SC acknowledging fiduciary duty of trustees, it has never put in place enforceable mechanisms of accountability, making it more of a dream.

A legislative reinforcement of the regime of debenture trustees by making specific changes in the Companies Act, 2013 and the SEBI (Debenture Trustees) Regulations, 1993 is the solution. There should be a clear granting of autonomous enforcement authority to trustees with the statutory right to commence insolvency proceedings, enforce security interests, as well as bind bondholders by collective action. Such a solution is consistent with the focus of the Supreme Court to creditor collectivity in Swiss Ribbons Pvt. Ltd. v. Union of India, where the SC acknowledged that an effective solution requires creditor action as opposed to a fragmented process of enforcement. By consolidating enforcement powers in trustees, the creditor centralises enforcement authority in a single representative body. Also, SEBI should dictate performance-based accountability requirements on trustees, including accountability penalties on failure to meet performance and disclosure requirements based on the outcome of recovery. SEBI could evaluate trustees through objective criteria such as timelines of default recognition, prompt initiation of insolvency proceedings, etc. This would give the corporate bond market a plausible enforcement base without upsetting the normal insolvency system.

Finally, the failure of the corporate bond market of India to grow is not due to the lack of capital but due to failure of the legal design. The prevalence of the ideas of private placements, fragmentation of regulations, and poor enforcement all restrain market depth and inclusiveness. The proportionate disclosure reform, the statutory regulatory coordination and the enforceable trustee accountability will provide a legally and institutionally viable way out of the said deficiencies. In the absence of this form of structural legal intervention, the aspiration of deepening the corporate bond market of India will stay a mere rhetoric as opposed to a transformational one.

IV. Conclusion

The poor state of the corporate bond market in India is not due to a lack of capital but structural legal inconsistencies . Liquidity, transparency, and retail participation have been stampeded by the pre-eminence of the Section 42 based private placements, regulatory fragmentation and laxity, especially in the enforcement by means of ineffective debenture trustees. Although the Report is justified in its vision of the increased role of corporate bonds in long-term capital formation, the achievement of its success depends on structural legal reform. The disclosure norms that are proportionate to debt, coordination of regulation by institutions and accountability of trustees should be obligatory. Only through such systematic recalibration, the corporate bond market could evolve into a stable component of the financial system in India.

About the Author

Vaibhav Singh Tiwari is a third-year law student at Dharmashastra National Law University, Jabalpur and Yash Sharan is a third-year law student at Hidayatullah National Law University, Raipur.

Editors

Suprava Sahu, Senior Editor

Himanshu Verma, Assistant Editor