Issue of Privately Placed Non-Convertible Debentures by Unlisted NBFCs

Funding is essential for a company to not only invest and expand but also to run its day-to-day operations. When a firm needs to raise money, it may consider debt, stock, venture capital, and other methods. Banks, non-banking financial companies, debt funds, and companies are increasingly relying on private placements of listed and non-listed Non-Convertible Debentures (NCDs) for fundraising from players such as pension funds, insurance agencies, foreign portfolio investors, and mutual funds to pay down debt and on-lend. This path, however, is fraught with legal and regulatory obstacles. Further, this blog Legal Window will guide you more in detail about the Issue of Privately Placed Non-Convertible Debentures by Unlisted NBFCs.

What do you mean by Non-Convertible Debentures?

Debentures are long-term financial assets that acknowledge the issuer’s debt commitment. Some debentures include the option of being converted into shares at the owner’s choice after a set period of time. Non-convertible debentures are debentures that cannot be converted into shares or equity (or NCDs). A Non-Convertible Debenture (NCD) is a debt instrument issued by a corporation, including NBFCs, with an original or initial maturity of less than one year and issued through a private placement. These debentures are used by firms for rising long-term funding through a public offering. In order to compensate for the non-convertibility, lenders are typically offered a higher rate of return than with convertible debentures.

Characteristics of Non- Convertible Debentures

• Limited credit risk: An NCD loses value as the system’s interest rate rises and gets value when the rate falls. When an NCD is held until maturity, however, the stated return is likely to be realised, and the risk of interest rate volatility is reduced or decreased.
• Higher rate of return: Historically, NCDs have delivered excellent interest rates as compared to other fixed-income investments.
• Flexible Term: Ranging from two to twenty years, this allows for greater maturity options. 
• NCDs are rated by credit rating companies that are certified and professional. 
• NCDs are normally listed securities, which mean they can be sold in the secondary market before expiration.
• No Taxation: According to section 193 of The Income Tax Act, there is no tax deduction at source (TDS) on NCDs provided in DEMAT method and listed on a stock market.
• Moreover, because NCDs are listed securities, they can profit from stock market changes and experience capital appreciation. 
• Interest Payment Alternatives: NCDs offer a variety of interest payment options, including monthly, quarterly, half-yearly, and annual interest payments.

Eligibility for Investing in Non-Conventional Debentures (NCDs)

Institutions: 

• NCDs can be purchased by Public Financial Institutions, Statutory Corporations, Commercial Banks, Cooperative Banks, and Regional Rural Banks.
• NCD-authorized Provident Funds, Pension Funds, Superannuation Funds, and Gratuity Funds.
• SEBI-registered Venture Capital and/or Alternative Investment Funds.
• IRDA-registered insurance companies
• National Investment Funds (NIFs).
  

Non- Institutional: 

• Companies, bodies corporate, and organisations that are registered under Indian law and are permitted to invest in NCDs.
• NCDs can be invested in by public/private charitable/religious trusts.
• Groups that are authorised to invest in NCDs are scientific and/or industrial research organisations.
• In the name of the partners, partnership firms are formed.
• The LLP Act of 2008 allows for the formation and registration of limited liability partnerships (No.6 of 2009).

Individuals

• Individuals of Indian descent who live in the area.
• Hindu Undivided Families

Advantages to Investors through NCDs

• High inflation rates- NCDs (non-convertible debentures) issued by NBFCs often pay interest rates ranging from 150 to 177 basis points, which is higher than what conventional banks pay on FDs (fixed deposits). NBFC-issued NCDs have a good reputation and are well-capitalized. And, because the issue of these NCDs is strictly monitored by The Reserve Bank of India (RBI), it can be a sign of hope for investors looking for safe funding. Likewise, because the rate of interest on other types of investments is not steady, NCDs appear to be a safe and efficient way for investors to raise funds in this situation.
• Investment is Secured- Debentures usually have a first charge or a second charge on the issuer’s assets. As a result, they are stable and, in most cases, safe when compared to other types of investing. Along with the greater rates of return and the potential for capital appreciation, this gives an additional benefit.
• Capital Appreciation- Aside from locking in higher rates, there is another benefit to investing in NBFC-issued NCDs. If rates fall by 25-50 basis points from their current levels, the investor will benefit from capital appreciation on the NCDs, as evidenced by their market price.

What is the Procedure for Issuing NCDs in NBFCs?

• According to conventional market practise, the company’s financial position must be communicated to potential investors.
• The investors must obtain a certified copy of the investors stating that the company has met all of the RBI’s qualifying conditions.

The corporation must follow all of the laws of the Companies Act of 2013, as well as any RBI restrictions: 

• The debenture certificate must be granted within the time frame established by the Companies Act of 2013.
• The company determines whether NCDs are issued at face value with a coupon rate or as zero-coupon instruments with a discount rate to face value.

Major Provisions under Companies Act, 2013 on NCDs

The provisions relating to the issuing of NCDs are covered under Section 71 of the Companies Act, 2013 (“Act”) and Rule 18 of the Companies (Share Capital & Debenture) Rules, 2014. Specific provisions to keep in mind when issuing Debentures are as follows:

• The company’s Board of Directors has the authority to issue NCDs under section 179(3) of the Act. 
• Debentures with voting rights cannot be issued.
• A secured debenture issue may be made as long as the redemption date is not more than 10 years from the date of issue. Before dealing with the matter, please note that the compliance and limits (i.e., Board Resolution or Special Resolution as the case may be) outlined in Section 180 of the Companies Act 2013 must be met.
• Such a debenture issue shall be secured by the creation of a charge on the company’s properties or assets, with a value adequate for the timely repayment of the debentures’ principal and interest.
• The corporation cannot grant debentures to more than 500 people unless it first appoints a debenture trustee, whose principal responsibility would be to protect the interests of debenture holders and to resolve their problems.
• In accordance with the terms and circumstances of the debentures’ issue, a corporation must pay interest and redeem the debentures. As a result, it should be emphasised that a firm can issue debentures with a 0% interest rate.
• The tribunal may, on the application of any or all of the debenture-holders, or the debenture trustee, and after hearing the parties involved, direct the corporation to redeem the debentures instantly on payment of interest and principal due thereon, by ordering.

Conclusion

In contrast with the same, we can conclude that NCDs are without a doubt the finest debt product for organizations looking for quick and substantial capital for expansion or other business objectives. We also see a number of advantages to investing in NCDs. If you are considering investing in NCDs, do your homework and research the various factors before making a decision. We, the Legal Window staff, will assist you throughout the procedure. Feel free to contact and reach us out at Legal Window for further questions.