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ISSUE OF NON-CONVERTIBLE REDEEMABLE UNSECURED DEBENTURES BY AN NBFC (i.e. FOR PRIVATE & PUBLIC LIMITED NBFC COMPANY
In this article we will describe about the process, how the debentures can be issued to some person without stating the name as Private Placement Basis or not covered in the definition of Public to the person intending to subscribe the debentures (Unsecured Non-Convertible & redeemable) to the intending subscribers. This scenario can be applied on both Public Company as well as Private Company.
In this scenario we will explain that how a company will be able to issue the debentures <= > to 50 persons without covered under the definition of Private Placement Basis in terms of Section 42 of Companies Act, 2013.
First of all we will try to understand some legal point to keep issue in front of you;
When a company can issue debentures?
A Company may issue debentures subject to following condition in terms of Section 71 of Companies Act, 2013 and Rule 18 of Companies (Share Capital & Debentures Rules), 2014 as amended;
1. Issue of debentures shall be approved by the members in their meeting by passing special resolution. Sec 71(1)
2. No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed.” Section 71(5)
In addition to the provisions of SEBI regulations, the aforesaid Section 71(5) also mandates the appointment of a debenture trustee when the offer or invitation is made to the public. Hence, it is important to determine when an ‘issue’ will be considered to be made to the ‘public’. The Act does not stipulate any specific provision for situations ‘when an issue will be deemed to be made to the public’. However, the reference of the same could be taken from Section 42(2) of the Act (as amended recently), wherein, the threshold limit for private placement is defined as 50 persons in a financial year. Hence, any issue to more than 50 persons would be outside the purview of ‘private placement’ and shall be construed as an issue to the ‘public’.
In view of the above, it is clear that the requirement for appointment of a debenture trustee is mandatory in case of debentures issued to the ‘public’ or to the ‘members of the issuer company exceeding 500’.
3. Issuance of debentures on private placement only to made to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed. (Section 42)
4. Appointment of debenture trustees and Listing of debentures is compulsory in terms of Companies Act 2013 and ICDR Regulation 2009 & SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE AND LISTING OF DEBT SECURITIES) REGULATIONS, 2008 only when
A. They are issued to more than 50 person on private placement basis and
B. They are issued to more than 500 members of company.
5. Face value of Debenture we should keep Rs. 20,000 to free from conflict in terms RBI circular No RBI/2014-15/475 DNBR (PD) CC No.021/03.10.001/2014-15 to keep extra precautions for debentures having maturity more than one year.
6. An NBFC (excluding Core Investment Companies) shall issue debentures only for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities / parent company / associates.
7. An NBFC shall not extend loans against the security of its own debentures (issued either by way of private placement or public issue).
PROCESS OF ISSUE OF DEBENTURES TO BE FOLLOW IN TERMS OF LAW;
1. First of all, pass a special resolution in Annual General Meeting or Extra Ordinary General Meeting of members of Company to issue redeemable non-convertible unsecured debentures. Section 71(1)
2. Interest rate shall also be decided by the members of company and the resolution should contain about the interest rate of debentures in brief. However, Companies Act, 2013 salient about the interest rate on debentures.
3. The resolution shall contain in brief the condition to issue the debentures that the debentures to be issued to only the members/shareholders of the company and they will not be more than 500 in any case.
4. By this resolution the issuance of debentures will considered neither private placement nor public issue as explained in brief above.
5. Whenever any person will come as interested to subscribe the debentures of company, make him member of company by allotting the shares or transferring the shares to him from existing member. Like that we will satisfy all the condition of law and issue him the amount debentures as he or she wish to subscribe.
DISCLAIMER;- The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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