Process of Issuance of Non-Convertible Debentures (NCDs)

A Company can seek funding from the public by issuing debt instruments instead of accepting deposits. Debentures are commonly known as debt instruments.

Section 2(30) of the Companies Act, 2013 defines Debentures - as “debenture”. It  consists of debenture stock, bonds or any other instrument of a company that proves a debt, whether or not secured by the company’s assets.

The following will not be deemed as Debentures:

a)    the instruments mentioned in Chapter- III-D of the Reserve Bank of India Act,1934.
b)    such other instrument, referred by the Central Government after discussing with the Reserve Bank of India, issued by a company.  

Meaning of Non- Convertible Debentures (NCD’s)

Non- Convertible Debentures (NCD’s) are those debentures of the company which are not converted into equity shares and redeem after the expiry of the specified time.

NCD is the debt instrument of the Company, and the company acknowledges repaying it after the specified period along with specified rate of interest.

Eligible issuers

NCDs may be issued by the following entities only if the banks /AIFIs/NBFCs do not consider them overdue. Companies.

• NBFCs, including Housing Finance Companies (HFCs);
• InvITs and REITs;
• All India Financial Institutions (AIFIs);
• Any corporate body and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014  legally allowed  to incur debt or issue debt instruments in India; and
• Any other entity specifically permitted by the Reserve Bank.

Eligible investors

• All residents are eligible to invest in NCDs.
• Non-residents  can invest in NCDs only as allowed by Foreign Exchange Management Act (FEMA), 1999 or the rules/regulations framed thereunder.

Requirements for Issuing Secured Non-Convertible Debentures:

A Company is limited to issuing Secured Non-Convertible Debentures (NCD’s) only. If a company issues NCDs without them being secured by the company's assets, it must list the securities on a recognized stock exchange to avoid being considered as deposits. Rule 2 (1) (c) of the 2014 Companies (Acceptance of Deposits) Rules states. The following criteria must be met for the issuance of secured NCDs:

1.    The redemption date must be within ten (10) years of the issue date. Infrastructure finance companies, companies involved in infrastructure projects, infrastructure debt fund NBFCs, and companies approved by the Central Government or RBI are authorized to issue debentures with a maturity period exceeding 10 years, up to 30 years.

2.    The debenture should be secured by a charge to ensure payment of both the debenture and its interest.

3.    The Debenture Trustee will be appointed by the company and a charge will be established in favor of the Debenture trustee.

4.    The qualifications and responsibilities of the Debenture Trustee need to be clearly defined.

5.    Every business must set up a Debt Repayment Reserve (DRR) by April 30th, and deposit or invest at least 15% of the total debentures due by the following March 31st.

Meaning of Private Placement

According to Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, and Section 42 of the Act "Private Placement" refers to offering securities to a specific group of individuals by a Company through a private placement offer-cum-application letter, excluding public offers.

The offer can only be extended to a maximum of two hundred (200) individuals in a financial year, not including qualified institutional buyers (QIB's) and Company employees receiving securities through ESOP.

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

1.    The Board needs to select individuals who will receive the NCD's from the Company and then create a list of those individuals to whom a subscription offer for debentures will be made.

2.    Preparation of draft form PAS-4 (Private placement offer cum Application letter)

3.    If secured debentures are issued, the Company must choose a Debenture Trustee before releasing the letter of offer for debenture subscription, within sixty days of allotment, and create a trust deed to safeguard interests.

4.    For specifically receiving subscription payment, open a new bank account.

5.    Determine the company's assets that will be used as collateral when issuing secured debentures.

6.    Schedule a Board meeting by sending a Notice to every Company Director at least seven days prior to the scheduled date, including the agenda, agenda notes, and draft resolutions for approval.

7.    The resolutions to be approved during the Board meeting are:

• Approval from the Board to release NCDs and finalize the terms of issuance.
• Approval of Form PAS-4 (Private placement offer cum Application letter).
• Appointment of a debenture trustee, when necessary.
• Authorization of the Debenture Trust Deed's execution by the debenture trustee.
• Opening of separate bank account
• Approval from the Board to raise the Company's borrowing limit under section 180 (1)(c) of the Act, pending approval from the members at a general meeting, if necessary.

8.    Submit the form MGT-14 within 30 days of passing the board resolution for issue of NCD’s (Non- Convertible Debentures) to the registrar of companies (ROC)

9.    Submit the form MGT 14 within 30 days of passing the special resolution if any to the (ROC) Registrar of companies.

10.    After filing the form, the Company will dispatch the Form PAS-4 together with all attachments

11.    The subscription amount will be received by the Company from all subscribers in a designated bank account. The subscription payment for debentures must come from the subscriber's bank account, and the Company will maintain a record of the bank account used for the payment. Each person who is eligible and wishes to participate in the private placement offering must complete the private placement application provided, and submit the required subscription funds through a cheque, demand draft, or other banking method, not cash.

12.    Schedule a Board meeting to issue debentures by sending a notice to every Director of the Company at least a week prior to the scheduled meeting date, including the agenda, agenda notes, and draft resolutions to be approved during the meeting.

13.    Call for the Board meeting and approve the specified resolutions:

• Allotment of NCDs
• Authorize the Directors to issue and sign the Debenture Certificate
• Sign the Debenture trust deed (SH-12)
• Create Debenture Redemption Reserve Account
• Create Charge on the assets of the Company

14.    File the Form PAS-3 with ROC within 15 days from the date of passing the resolution for the allotment of shares

15.    File the Form CHG-9 with ROC within 30 days of creation of charge.

16.    The records in the registers kept in accordance with Section 88 of the Act must be updated within a week of the Board of Directors' authorization of debenture allocation.

17.    The debenture certificate must be issued within six months of debenture allotment.

18.    The Company must pay Stamp Duty when allocating NCDs.

General Guidelines for issuance of NCD to NRI

(a) Primary Issuance

• NCDs shall be issued in dematerialized form and held with a depository registered with SEBI.
• NCDs shall be issued with minimum denomination of ?5 lakh and in multiples of ?5 lakh thereafter.
• The period of an NCD shall not be less than ninety days or more than one year.
• Allotment of an NCD with options (call/put) is not permitted.
• Issuance of an NCD is not permitted to be underwritten or co-accepted.
• The offer documents for the issue of NCDs shall at the minimum
• The payment of allotment of NCDs, including both payment of funds to the issuer and issue of NCDs to the investors, must be completed within a T+4 working days, where T is the trade date, i.e., the date on which the trade details, including price/rate are agreed by the issuer and the investor(s).
• The total subscription by all individuals, including Hindu Undivided Families, in any primary issuance of NCDs cannot go beyond 25 per cent of the total amount issued.

(b) End-use

• Funds raised through NCDs shall ordinarily be used to finance current assets and operating expenses. The end use of the funds raised through an NCD shall be mentioned in the offer document.
• If the funds raised are used for other purposes than financing current assets and operating expenses, the same/ specific end-use must be mentioned in the offer document.
• The issuer must provide a certificate from the CEO/CFO to the IPAs confirming that the proceeds of NCDs were used for the specified purposes and that all other provisions of the offer document were met. The certificate must be sent to the IPA within 3 months of the CP/NCD being issued or when the issuance matures, whichever is earlier.

(c) Rating Requirement

The Credit Rating Agency has assigned a minimum credit rating for issuing NCD. It shall be A3 according to the rating symbol and as per the definitions of SEBI.

(d) Primary Market - Other Conditions

• An Issuing and Paying Agent (IPA) and a Debenture Trustee shall be appointed for each issuance of an NCD.
• The approval of the primary issue of an NCD shall be routed through the IPA.
• The issuer can issue only the approved limit (set by the board of directors, or its equivalent body) of NCDs aggregate amount. The aggregate amount is regulated by the financial sector regulator. It is also subject to limits by concerned regulatory body.

(e) Repayment of NCDs

• No grace period will be given for the repayment of NCDs.
• The funds for redemption must be made available by the issuer to the IPA by 3:00pm on the due date.
• The repayment of an NCD, including coupon payments, shall be routed through the IPA.

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