Issuance of Secured Non-Convertible Debentures by a Private Company

Non-Convertible Debentures (“NCDs”) are debt instruments which cannot be converted into equity shares of a company. Return on NCDs is by way of interest, it is regarded as corporate debt.

As per Rule 2(1)(c)(ix) and 2(1)(c)(ixa) of the Companies (Acceptance of Deposits) Rules, 2014, any amount raised by issue of NCDs not constituting a charge on the assets of the Company and are listed on a recognised stock exchange as per applicable regulations made by the Securities and Exchange Board of India shall not be considered as deposit. Therefore, we can infer that in case of issuance of secured NCDs, listing on stock exchange is not necessary if the first charge is being created on the assets of the Company.

Further, as per Rule 18(1)(a) of the Companies (Share Capital and Debentures) Rules, 2014, the issue of secured debentures may be made, provided that the date of its redemption shall not exceed ten years from the date of issue. Provided that the following classes of companies may issue secured debentures for a period exceeding ten years but not exceeding thirty years i.e.:

Companies engaged in setting up of infrastructure projects;

1. Infrastructure finance companies as defined in direction 2 of Non-Banking Financial (Non-deposit accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007;
2. Infrastructure Debt Fund Non-Banking Financial Companies as defined in clause (b) of direction 3 of Infrastructure Debt Fund Non-Banking Financial Companies (Reserve Bank) Directions, 2011;
3. Companies permitted by a Ministry or Department of the Central Government by Reserve Bank of India or by the National Housing Bank or by any other statutory authority to issue debentures for a period exceeding ten years.

The said issue of debentures shall be secured by the creation of a charge on the properties or assets of the company or its subsidiaries or its holding company or its associates companies, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon.

Process of Issuance of NCDs through Private Placement

“Private Placement” as defined under Section 42 of the Companies Act, 2013 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.

NCDs can be issued through Private Placement through the following procedure:

1. The board must identify the persons to whom the company shall issue NCDs and thereafter shall prepare the list of such persons to whom offer for subscription of NCDs will be given.
2. Preparation of draft form PAS-4 (Letter of Offer) so that the same can be approved in the board meeting.
3. In case of issue of secured NCDs, the company shall appoint debenture trustee before the issue of letter offer for subscription of its NCDs and not later than sixty days after the allotment of the NCDs and execute a debenture trust deed to protect the interest of NCD holders.
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 issuance of secured NCDs).
6. Call a board meeting by issuing a notice to all the directors of the company at least 7 (Seven) days before the date fixed for the meeting along with agenda, notes to agenda, and draft resolutions to be passed at the meeting.

Resolutions to be passed at the board meeting are:

• Approval for issue of NCDs and deciding the terms of issue;
• Approval of form PAS-4;
• Appointment of debenture trustee;
• Approval of debenture trust deed to be executed with the debenture trustee;
• Opening a separate bank account; and
• Approval of the board to increase the borrowing limit of the company u/s 180(1)(c) of the Act subject to the approval of the members in general meeting, if required.

1. Issue the notice of general meeting along with explanatory statement for passing of special resolution;

Resolutions to be passed at the general meeting:

• Approval for issue of NCDs and deciding the terms of issue;
• Approval of form PAS-4;
• Appointment of debenture trustee; and
• Approval of debenture trust deed to be executed with the debenture trustee.

1. Filing of Form MGT -14 with Registrar of Companies (“ROC”) within 30 (Thirty) days of passing the special resolution in general meeting.
2. The offer in Form PAS-4 together with all attachments should be dispatched.
3. The Company shall receive the subscription amount from all the subscribers in the separate bank account opened for this purpose.
4. Call a board meeting for allotment of NCDs by issuing a notice to all the directors of the company at least 7 (seven) days before the date fixed for the meeting along with agenda, notes to agenda and draft resolutions to be passed at the meeting.

Resolutions to be passed at the board meeting:

• Allotment of NCDs;
• Authorize one or more Directors to issue and sign the NCD certificate;
• Enter into debenture trust deed (SH-12);
• Creation of DRR, [Section 71(4) of the Companies Act, 2013 and Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014];
• Creation of charge on the assets of the company; and
• Filing of form PAS-3 with ROC within 15 (Fifteen) days from the date of allotment of NCDs.

1. Filing of e-form CHG-9 with ROC within 30 (Thirty) days of creation of charge.
2. The entries in the registers maintained under Section 88 of the Act shall be made within 7 (Seven) days after the board of directors approves the allotment of NCDs.
3. Issue NCD certificate within 6 (Six) months from the date of allotment of NCDs.
4. The Company shall have to make payment of Stamp Duty on allotment of NCDs.

Authored by:

Diviay Chadha, Partner and Ambuja Jain, Associate at Singhania & Co.