A clause in the new Companies Act stipulating that every company should create a debenture redemption reserve (DRR) will dent the profits of non-banking financial companies (NBFCs) and deter them from floating bonds.

According to the new Companies Act, which came into force from April 1, a debenture redemption reserve should be created out of the profits of the company available for payment of dividend and the reserve should be equivalent to at least 50% of the amount raised through the debenture issue before redemption commences.

?At a time when the government is trying to develop the bond market, such guidelines will only make it difficult to raise money as we always have to shell out 50% of what we plan to raise,? said Hemant Kanoria, chairman and managing director, Srei Infrastructure Finance.

NBFCs in India raise 35-65% of money through the non-convertible debentures (NCDs) to lend to borrowers. They also borrow from banks and industry experts feel that with the creation of a debenture redemption reserve, NBFCs will be deterred from raising money through NCDs and depend more on banks.

?The cost of borrowings through debentures for retail NBFCs is high (between 10.5% and 12.5%). If they are required to invest 15% of debentures maturing in a given year in bank deposits , then these will earn negative returns of 200 basis points. This will push up the cost of funds,? Macquarie Equities’ analysts wrote in a note on Wednesday.

According to the earlier Companies Act, 1956, firms did not have to create a reserve if they placed bonds privately, but had to reserve 25% in DRR in case of public issues. Another clause in the new Companies Act makes it mandatory for all companies to invest or deposit a sum not less than 15% of the amount of its debentures maturing during the financial year ending March 31, 2015.

Meanwhile, NBFCs have made representations to MCA for exemption from the new provision. The clause of investing 15% of the amount of redemption in government securities will strain liquidity because the cost of bonds is normally higher than the return on money invested in G-Secs, Kanoria added.

According to V Lakshmi Narasimham, chief financial officer of Magma Fincorp, an NBFC that raised R1,000 crore through NCDs in FY14, said: ?It is definitely a deterrent as the fund would heavily dent our profitability. ?

Sebi data show that bonds worth R2.76 lakh crore were issued in fiscal 2014, compared to R3.61-lakh-crore bonds issued in the previous financial year. ?If guidelines change every quarter, then how are we supposed to do business??said Kanoria.

Meanwhile, the ministry of corporate affairs had issued a circular in February 2013, which exempted banking companies from DDR. The DRR requirement on NBFCs registered with RBI was cut to 25% and there was no DRR requirement for privately placed debentures by NBFCs. However, the validity of the circular is yet to be ascertained as it was issued in February 2013 and the new Companies Act came into force on April 1, 2014, Macquarie analysts wrote.