A Regulation to issue corporate bonds

To appraise concerns raised in light of limited access to finance the Bhutanese corporate bodies, the economic affairs ministry has developed the Regulations for Issue of Corporate Bonds, 2012 under the Companies Act of 2000.

The regulation would also address the lack of securities in the market for the investors to invest giving them more avenues to invest and consequently it will activate the capital market which is dormant as of now, said the Registrar of Companies, Karma Yeshey.

Further he said that this regulation is for all companies irrespective of their size as long as they fulfill the criteria in the regulation.

Secondary to all of this, it will also address the affected business after the Royal Monetary Authority’s directive on a semi-permanent freeze on the loans from banks to the corporations.

A corporate bond is a  bond  issue by a  corporation, one that a corporation issues to raise money effectively in order to expand its business. It is usually applied to long-term debt instruments, generally with a maturity date which falls at least a year after the issue date.

The Regulatory Impact Assessment carried out by Company Registry Division under Department of Industry, says ‘the regulation is a timely initiative necessitated by circumstances and change in regulatory environment, at this juncture. It has reservoir of services open for the Companies to tap and benefit out of it.

The analysis of the underlying issues of the companies and capital markets shows that the constraints are limited access to finance and dormant capital market.

For the former, the issuance of corporate bonds would provide low cost financing, higher returns and stability for the companies. This would be so, as the mechanism would ensure that all incorporated companies eligible for expansion will have access to more capital.

The solution for a dormant capital market is to encourage more public listed companies to issue bonds.

The highly collateral based banking practice, lack of secured transaction in practice based on moveable properties and lack of participants in the capital market including the brokers and corporate bodies were pointed out as the caused for the two underlying issues.

Further the report also points out the underlying motive forces. It includes improving or developing Capital Market and improving the access to finance for Corporate Bodies or Companies and to establish a transparent legal framework for approval of issue of corporate bonds in the market as the provisions of the Companies Act of 2000, lack clarity on bond issues. This regulation is the answer for this problem.

There is a dire need for the regulation due to the fact that even though the Companies Act defines securities including shares, bonds and debentures, there are no clear provisions stipulating the process and standards to issue debt securities.

It is also to facilitate adequate access to more capital for the registered companies and by this trend, even unregistered business may join to formalize their business under the Companies Act. As of date, there are very large businesses which are not yet formalized.

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