Listing of Non Convertible Debentures by Private Companies

Funding is crucial for a corporate, not only to invest and to expand but also to operate their daily business. When a company needs to raise funds, it may look at various options such as debt, equity, venture capital etc.  Debt financing is done by way of issuing various bonds, debentures, bills or notes. Compared to equity, debt requires lower financing cost and helps lower the company’s taxes because of the allowable interest deductions. Debt is associated only with the interest payment obligations and has no share in profits of the company, thereby retaining profits within the company. As long as using debt doesn’t threaten the financial soundness of a company in times of difficulties, equity owners welcome certain debt uses to help enhance their investment returns.

As per Section 2(30) of Companies Act, 2013 “Debentures” include 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.

“Private Company” means a company which by its articles restricts the right to transfer its shares; limits the number of its members to two hundred and prohibits any invitation to the public to subscribe for any securities of the company.

Non-Convertible Debentures (“NCD”) are those debentures which are not convertible to equity shares of the Company and are redeemed at the expiry of a specified period.

A. MAJOR PROVISIONS FOR ISSUE OF DEBENTURES AS PER COMPANIES ACT, 2013:

Section 71 of the Companies Act, 2013 (“Act“) and rule 18 of Companies (Share Capital & Debenture) Rules, 2014 deals with the provisions relating to the issuance of NCDs. The following are the specific provisions to be kept in mind while issuing Debentures:

• Board of Directors of the company pursuant to section 179(3) of the Act have a right to issue NCDs.
• Debentures cannot be issued with voting rights.
• An issue of secured debentures may be made, up to a maximum redemption period of ten years from the date of issue otherwise the same would be considered as deposits. In the case of a company engaged in the setting up of infrastructure projects, such period of redemption may exceed a period of ten years but cannot exceed thirty years.
• Issue of secured debentures shall be secured by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of the amount in relation to the debentures and interest thereon. The company needs to file with the registrar of companies for creation of charge in Form CHG-9.
• On the issue of debentures, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilized by the company except for the redemption of debentures.
• The company cannot issue debentures to more than five hundred persons, unless the company has, before such issue or offer, appointed a debenture trustee, whose primary duty would be to protect the interest of debenture holders and redress their grievances.
• A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue. Hence, it is noted that a company can issue debentures at a zero per cent interest rate.
• Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due, the tribunal may, on the application of any or all of the debenture-holders, or debenture trustee and, after hearing the parties concerned, direct, the company to redeem the debentures forthwith on payment of principal and interest due thereon, by order.

B. PROCEDURE FOR ISSUE OF NON CONVERTIBLE DEBENTURES ON PRIVATE PLACEMENT BASIS:

Private placement means any offer or invitation to subscribe or issue the securities to a select group of persons who have been identified by the Board (other than by way of public offer) through private placement offer-cum-application.

• Private Placement of each kind of securities shall be made to persons, not exceeding 200 in a financial year excluding the qualified institutional buyers and employees under the employee stock option scheme.
• The offer shall be authorized by the articles of association of the company and shall be approved by the shareholders of the company by a special resolution.
• The company shall issue offer cum application letter in form PAS-04, serially numbered and addressed specifically to the persons to whom the offer is made, either in writing or by way of an electronic mode within 30 days of recording of the name of such person.
• The monies received on the application of securities shall be kept in a separate bank account.
• The company making an offer shall allot its securities within 60 days from the date of receipt of the application money. If the company fails to allot the securities, the company shall return the subscription money within 15 days from the expiry of sixty days and if it fails to repay, it shall be liable to repay the same with interest of 12% p.a. after the expiry of the sixtieth day.
• The company needs to file a return of allotment along with the complete list of allottees within 15 days from the date of allotment in Form PAS-3.
• The company shall maintain the complete record of private placement in Form PAS-5 and is to be filed with Registrar of Companies along with the return of Allotment in Form PAS-03.

C. PAYMENT OF STAMP DUTY ON ISSUANCE OF NON CONVERTIBLE DEBENTURES:

As per the provisions of the Indian Stamp Act, stamp duty is 0.005% for the issuance of debentures and 0.0001% for transfer and re-issue of debentures.

D. LISTING OF NCD’S ISSUED ON PRIVATE PLACEMENT BASIS:

Listing means the formal admission of securities of a company to the trading platform of the exchange. It is a significant occasion for a company on the journey of its growth and development. It provides liquidity to investors and ensures effective monitoring of compliance of the issuer and trading of the securities in the interest of investors.

E. ISSUE OF NCD’S UNDER SEBI (ISSUE AND LISTING OF DEBT SECURITIES) REGULATIONS, 2008:

Conditions for Listing of NCD’s:

• The listing application along with the disclosures as specified shall be submitted to the recognized stock exchange within fifteen days from the date of allotment of such securities.
• NCDs are issued in compliance with the provisions of the Act, rules prescribed thereunder and other applicable laws;
• Credit rating has been obtained in respect of such securities from at least one credit rating agency registered with the Board;
• The securities proposed to be listed are in dematerialized form;
• Where the application is made to more than one recognized stock exchange, one of them shall be chosen as the designated stock exchange;
• Conditions of listing of such securities as specified in the Listing Agreement with the stock exchange where such securities are sought to be listed are to be complied with;
• The designated stock exchange shall collect a non-refundable regulatory fee of Rupees Five Thousand at the time of listing of NCD’s issued on a private placement basis.
• The conditions relating to the issue of International Securities Identification Number (ISIN), as may be specified by the Board from time to time shall be complied with.

Filing of Shelf Disclosure Documents:

• The private placement of NCD’s and seeking listing thereof on a recognized stock exchange may file a shelf disclosure document containing disclosures as required.
• If a Shelf Disclosure Document is filed, filing of disclosure document while making subsequent private placement of NCD’s for a period of 180 days from the date of filing of the shelf disclosure document is not required.
• While making any private placement under the shelf disclosure document, the company shall file with the concerned stock exchange an updated disclosure  document with  respect  to each tranche,  containing details  of  the  private placement  and  material  changes,  if  any,  in  the information provided in the shelf disclosure document.

Disclosures to be filed with Stock Exchanges:

The following disclosures along with the listing application shall be filed to the stock exchange at the time of listing of NCD’s:

• A brief history of the issuer since its incorporation, Memorandum and Articles of Association and necessary resolution(s) for the allotment of the NCD’s;
• Copy of last three years audited Annual Reports;
• A statement containing particulars of, dates of, and parties to all material contracts and agreements;
• Copy of the Board/Committee Resolution authorizing the borrowing and list of authorized signatories;
• An undertaking from the issuer stating that the necessary documents for the creation of the charge,  where applicable,  including the  Trust  Deed, would be  executed within  the time frame prescribed  in  the relevant  regulations/act/rules  etc  and  the  same  would  be uploaded  on  the  website  of  the  designated  stock  exchange,  where  the  NCD’s have been listed, within five working days of execution of the same.
• In addition to the above, the issuer shall submit latest audited/limited review half-yearly and consolidated financial information and auditors qualification, if any to the debenture trustee. An undertaking shall be submitted stating that, till the redemption of the NCD’s, the details as aforementioned will be provided to debenture trustee within the timeline prescribed by the board from time to time;
• A brief summary of the business of issuer and the line of business the overview, corporate structure, key operational and financial parameters for the last 3 years and projects cost and means of financing;
• Summary term sheet containing information pertaining to Non-Convertible Debt Securities;
• Disclosures pertaining to willful default.

Creation of Security:

• An undertaking in the Information Memorandum is to be given that the assets on which charge is created are free from any encumbrances and in cases where the  assets are already charged  to  secure  a ,  the permission  or  consent  to  create  a  second  or  pari-passu charge on the assets of the issuer has been obtained from the earlier creditor.

Trading of NCDs:

• The NCDs issued on a private placement basis, which are listed in recognized stock exchanges, shall be traded and such trades shall be cleared and settled in recognized stock exchanges subject to conditions specified by the Board.
• In case of trades of NCDs which have been made over the counter, such trades shall be reported on a recognized stock exchange having a nationwide trading terminal or such other platform as may be specified by the Board.

Conditions for Continuous Listing of NCD’s:

• All conditions of listing specified in the respective listing agreement for NCDs are to be complied with.
• Every rating obtained shall be periodically reviewed by the registered credit rating agency and any revision in the rating shall be promptly disclosed to the stock exchange(s) where the NCDs are listed and also to be disseminated to investors and prospective investors.
• The issuer,  the  respective  debenture  trustees  and  stock  exchanges  shall  disseminate  all information and reports  on  the NCDs, including compliance reports filed by the issuers and the  debenture  trustees  regarding  the  NCD  to  the  investors  and  the  general  public  by placing them on their websites.
• Debenture trustee shall disclose the information to the investors and the general public by issuing a press release if there is a default to pay interest or redemption amount or failure to create a charge on the assets or revision of rating assigned to NCD.

F. PROCEDURE FOR LISTING OF NCD’s:

The Issuance of NCD will entail the following procedure:

• Obtaining electronic connectivity from the Depository Participant.
• Obtaining credit rating from one of the recognized credit rating agency.
• Apply for one or more stock exchange for the listing of NCDs and obtain in-principle approval.
• Appointment of debenture trustee and execution of debenture trust deed.
• Obtaining in-principal approval from the stock exchanges.
• Filing of final listing application along with disclosure document with the stock exchange post allotment of NCD’s.

G. COMPLIANCES UNDER SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015:

The issuer shall comply with the following compliances post listing of its NCD’s on the stock exchange(s):

S.No	Compliance	Timeline
1.	Intimation for payment of interest/redemption amount to stock exchange	Atleast 11 working days prior to date of payment/redemption.
2.	Intention to raise funds through new non-convertible debt securities to stock exchange.	Atleast 2 days prior to Board Meeting called for recommendation/declaration  on issuance of new NCD’s
3.	Disclosure of audited/un-audited financial results along with Limited Review report/Audit report to stock exchange.	Within 45 days from the end of half-year.
4.	Certificate from a debenture trustee taking note of financial results to the stock exchange.	Within 7 working days from the date of submission of results with the stock exchange.
5.	Publication of financial results in Newspaper	Within 2 calendar days from the conclusion of the meeting of Board of Directors for approval.
6.	Review of credit rating obtained	Atleast once in a year.
7.	Copy of the annual report along with a copy of auditors certificate in respect of utilization of funds during the implementation period of the project for which the funds have been raised to Debenture Trustee.	Same time as it is issued to stock exchange.
8.	Certificate from statutory auditors regarding maintenance of hundred percent asset cover or asset cover as per the terms of offer document/ Information Memorandum and/or Debenture Trust Deed, including compliance with all the covenants to Debenture Trustee	Half yearly along with financial results.
9.	Certificate regarding timely payment of interest or principal obligations to stock exchange.	Within 2 days of the interest or principal or both paid.
10.	An undertaking to stock exchange stating that all the documents and intimations required to be submitted to Debenture Trustees have been provided with	On an annual basis.
11.	Intimation of record date for payment of interest or principal amounts to stock exchange	Atleast 7 working days prior to record date.
12.	Maintenance and updation of functional websites by the issuer.	Ongoing

H. IMPACT OF LISTING OF NCD’S:

A company which has listed its NCD’s on a recognized stock exchange has to comply with the provisions of Woman Director as per section 149 of the Act; establishment of Audit Committee and Nomination and Remuneration Committee; implementation of vigil mechanism; applicability of Secretarial Audit; appointment of KMP’s as per section 203 of the Act.

I. CONCLUSION:

Listing brings in liquidity and ready marketability of securities on a continuous basis which helps investors to find a buyer over the market platform. The listing provides an exclusive privilege to securities on the stock exchange. The stock exchange provides transparency in transactions of listed securities and equality and competitive conditions.

Authors: Prashant Jain, Co-Founder & Partner; Prajakta V Gokhale, Associate; Nisha Jhawar, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) prajakta@rna-cs.com (iii) nisha@rna-cs.co.in.