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Private Placement of Non-Convertible Debentures

March 13, 2020

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Private Placement of Non-Convertible Debentures

Background:

A Company may raise loan from the public other than deposits by way of issuing instruments of debt against the Company. Such instruments of debt are usually called debentures.

"Debenture" as defined under Section 2(30) of the Companies Act, 2013 (“the Act”) includes debenture stock, bonds or any other instrument of a Company evidencing a debt, whether constituting a charge on the assets of the Company or not;

The following shall not be treated as Debentures:

(a) the instruments referred to derivatives, money market instruments, Repo, reverse repo, and securities in Chapter III-D of the Reserve Bank of India Act, 1934; and

(b) such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a Company,

A detailed note on procedure for private placement of Non-Convertible Debentures (NCD’s) is mentioned below.

A Company can issue two types of Debentures:

  1. Debentures secured by charge on any assets.
  2. Debentures Compulsorily convertible into shares of the company within five years.

What are Non- Convertible Debentures (NCD’s)?

Non-convertible debentures are those debentures which are not convertible to equity shares of the Company and are redeemed at the expiry of specified period. Thus, NCD is an instrument of debt executed by the company, acknowledging its obligation to repay the sum along with specified rate of interest.

Conditions to be fulfilled for issue of Secured NCD’s:

A Company can only issue Secured Non-Convertible Debentures (NCD’s). In case of issue of NCD’s by a Company not constituting a charge on the assets of the Company, it shall be mandatory for listing of the securities on the recognized stock exchange so that same does not come under the purview of deposits. (Rule 2 (1) (c) of Companies (Acceptance of Deposits), Rules, 2014). The below conditions have to be fulfilled for issue of secured NCD’s:

  1. The date of redemption shall not exceed ten (10) years from the date of issue. Provided that Infrastructure finance companies, Companies engaged in Infrastructure projects, Infrastructure Debt Fund Non-Banking Financial Companies and Companies permitted by Ministry or Department of Central Government or by RBI can issue Debenture beyond a period of 10 years but up to 30 years
  2. Such issue of debenture should be secured by creation of charge having value for the due payment of the debenture and the interest thereon
  3. The company shall appoint Debenture Trustee and Charge shall be created in favor of the Debenture trustee
  4. Qualification and role of Debenture Trustee must be clearly set out
  5. Every Company required to create DRR shall on or before the 30thday of April Deposit or invest as the case may be, a sum which shall not be less than 15% of the amount of its debentures maturing during the year ending on 31st day of March of the next year

What is Private Placement?

"Private Placement" as defined under Section  42 of the Act read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 means any offer or invitation to subscribe or issue of securities to a select group of persons ("identified persons") by a Company (other than by way of public offer) through private placement offer-cum-application letter.

Note:

Offer shall not be made to more than two hundred (200) persons in aggregate in a financial year excluding the qualified institutional buyers (QIB’s) and employees of the Company to whom securities are being offered under ESOP.

Procedure for issuance of NCD’s through Private Placement route:

The detailed procedure or steps for private placement of NCD’s are:

  1. The Board must identify the persons to whom the Company shall issue NCD’s and thereafter shall prepare the list of such persons to whom offer for subscription of debentures will be given.
  2. Preparation of draft form PAS-4 (Private placement offer cum Application letter) so that the same can be approved in the Board Meeting.
  3. In case of issue of secured debentures, the Company shall appoint Debenture Trustee before the issue of letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures and execute a debenture trust deed to protect the interest thereon (Section 71(3) of the Act read with relevant rules).
  4. Open a separate Bank account for the receipt of subscription amount
  5. Identify the assets of the Company on which charge will be created (in case of issue of secured debentures).
  6. Call a Board meeting by issuing a notice to all the Directors of the Company at least seven days before the date fixed for the meeting along with agenda, notes to agenda and draft resolutions to be passed at the meeting.
  7. Resolutions to be passed at the Board meeting are:
  • Approval of the Board for issue of NCD’s and deciding the terms of issue
  • Approval of Form PAS-4 (Private placement offer cum Application letter)
  • Appointment of debenture trustee, if required
  • Approval of Debenture Trust Deed to be executed with the debenture trustee
  • Opening of separate bank account
  • Approval of the Board to increase the borrowing limit of the Company u/s 180 (1)(c) of the Act subject to approval of the members in general meeting, if required
  • Issue the notice of general meeting along with explanatory statement for passing of special resolution u/s 180 (1)(c) of the Act

Note:

  • Holding of General meeting and passing of special resolution is not required in case the issue will be within the borrowing limit of the Company as prescribed under Section 180(1)(C) of the Act.
  • Section 180 of the Act is not applicable to Private Company
  1. Filing of Form MGT-14 with the Registrar of Companies (ROC) within 30 days of passing the Board resolution for issue of NCD’s
  2. Filing of Form MGT -14 with ROC within 30 days of passing the special resolution in general meeting, if any.
  3. The offer in Form PAS-4 together with all attachments should be dispatched.

Note: A Company shall issue the offer in Form PAS-4 only after the Board Resolution or special resolution has been filed with the ROC.

  1. The Company shall receive the subscription amount from all the subscribers in the separate bank account opened for this purpose.

Note:

  • The payment to be made for subscription of debentures shall be made from the bank account of the person subscribing to such debentures and the Company shall keep the record of the Bank Account from where such payment for subscription has been received.
  • Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash
  1. Call a Board meeting for allotment of debentures by issuing a notice to all the Directors of the Company at least seven days before the date fixed for the meeting along with agenda, notes to agenda and draft resolutions to be passed at the meeting.

 Note: The allotment of NCD’s shall be made within 60 days from the date of receipt of subscription money.

  1. Convene the Board meeting and pass the following resolutions:
  • Allotment of NCD’s
  • Authorize one or more Directors to issue and sign the debenture certificate
  • Enter into Debenture trust deed (SH-12)
  • Creation of Debenture Redemption Reserve
  • Creation of Charge on the assets of the Company
  1. Filing of e-form PAS-3 with ROC within 15 days from the date of allotment of debentures.

Note: The Company shall not utilize monies raised through private placement unless allotment is made and the return of allotment is filed with the ROC.

  1. Filing of e-form CHG-9 with ROC within 30 days of creation of charge.
  2. The entries in the registers maintained under Section 88 of the Act shall be made within seven days after the Board of Directors approves the allotment of debentures.
  3. Issue Debenture Certificate within 6 (Six) months from the date of allotment of Debentures.
  4. The Company shall have to make payment of Stamp Duty on allotment of NCDs.
  5. The Company shall follow the SEBI (Issue and listing of debt securities) Regulations in case of listing of NCD’s:
  • Obtaining credit rating from at least one credit rating agency registered with SEBI
  • Intimation of the Board meeting to the stock exchange at least two working days in advance where securities of the Company are listed excluding date of Intimation and date of Meeting

Filing of e-forms for private placement of NCD’s:

Private-Placement of NCD's Forms Flow Chart

Private-Placement of NCD's Forms Flow Chart

Conclusion:

Thus, NCD are the  types of debentures which are not convertible to equity shares of the Company and are redeemed at the expiry of specified period.  They are one of the methods of raising the debt for the Company instead of approaching banks and financial institutions for loans which charge interest at higher rates. The above-mentioned procedure for Private Placement of NCD’s has been explained in view of Sections 42, 71 and 180 (1)(c) of the Act read with relevant rules.

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