Law Grp 7 Final

8/13/2019 Law Grp 7 Final

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LEGAL AND REGULATORY

ASPECTS OF DEBT MARKET ININDIA

Presented by :-Sanmeet Surve 160Dharma Tanna 162Dhriti Udeshi 170Vishesh Valecha 172Mayur Varsekar 173

Hemanti Verma 174Prashant Sheth 178Vinit Shah 179Nikunj Shah 180


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Introduction

Purpose of Debt Market

Segments of Debt Market

Trading of Securities

Records of holding Securities

Investors in debt market


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DEBT MARKETINSTRUMENTS


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Instruments

CORPORATE DEBENTURE Non-Convertible Debentures (NCDs)Partly Convertible Debentures (PCDs)

Fully convertible Debentures (FCDs)Optionally Convertible Debentures (OCDs)Secured DebenturesUnsecured Debentures

FIXED INCOME PRODUCTS


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Instruments

INTEREST BASED BONDSCoupon Bonds

Zero Coupon Bonds

DERIVED INSTRUMENT

Mortgage BondsPass Through CertificatesParticipation Certificates


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Instruments

BENCHMARKED INSTRUMENTSFloating Interest RateInflation Linked Bonds

MONEY MARKET INSTRUMENTS Call MoneyTreasury Bills

Term Money MarketCertificates of Deposits (CDs)Commercial Papers (CP)Inter-corporate DepositsCommercial Bills


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KEY TERMS


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Key Terms

NDS It is an electronic platform for facilitatingdealing in Government Securities and Money MarketInstruments

Roll over of debt securities - rollover means youReinvest funds from a mature security into a newissue of the same or a similar security.


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Key Terms

Abridged prospectus - Abridged Prospectus is ashorter version of the Prospectus and contains all thesalient features of a Prospectus. It accompanies the

application form of public issues.Shelf Prospectus - Shelf prospectus is a typeof public offering where certain issuers are allowedto offer and sell securities to the public without aseparate prospectus for each act of offering.


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Key Terms

STRIP - Separate Trading of Registered Interest and PrincipalSecurities are T-Notes, T-Bonds whose interest and principal

portions of the security have been separated, or " stripped

CSGL - Constituents' Subsidiary General Ledger accountmeans an SGL account opened and maintained with RBI by anagent on behalf of the constituents of such agent, i.e. a secondSGL account opened by an agent with the RBI to hold thesecurities on behalf of their constituents.DCA - The ministry is primarily concerned with theadministration of the Companies Act, 1956, and other alliedActs and rules & regulations


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Key Terms

DEA - it is the nodal agency of the Union government toformulate and monitor the country's economic policies and

programmes that have a bearing on domestic and internationalaspects of economic management.

FIPB - The Foreign Investment Promotion Board (FIPB) is anational agency of Government of India, with the remit toconsider and recommend foreign direct investment (FDI)which does not come under the automatic route.

CLB - Company Law Board is an independent quasi-judicial body in India which has powers to overlook the behaviour ofcompanies within the Company Law.


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SEBI REGULATIONSON ISSUE OF DEBTSECURITIES 2008


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General Conditions

The issuer shall appoint one or more debenturetrustee with its consentThe issuer shall not issue debt securities for

providing loan to or acquisition of shares of any person who is part of the same group.


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Filing of draft offer document

Draft offer document needs to be filed with thedesignated stock exchange.

The document should be made public by posting thesame on websiteIt should be displayed on website of issuer,merchant banker and stock exchangeDetails like name, address, email id of complianceofficer and issuer should be mentioned


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Filing of draft offer document

A copy should be also be sent to Board for itsrecords.The lead merchant banker should also provide adue diligence certificate to the board


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Mode of Disclosure of offer document

The offer document shall be displayed on website of stockexchangeThe offer document shall be filed with the ROC while filingwith stock exchange

Person requiring physical copy should be provided bymerchant banker or the issuerThe issuer and lead banker should ensure following :-

Every application form issued should be accompanied byabridged prospectus. The abridged prospectus should not contain unnecessaryitems Adequate space should be provided in application form tofill details like name, etc


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Other guidelines

Disclosure in offer documentElectronic issuanceMinimum subscription

UnderwritingDebenture Redemption Reserve


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Trust Deed

The issuer shall execute the trust deed in favor ofdebenture trustee within 3 months of closure of theissue

The deed shall contain following clauses as persection 117A:- A trust deed should be issued in such form as

prescribed by SEBI from time to time.

A copy of Trust deed shall be open to inspection to thedebenture holders. Failure to above provision would led to penalty.


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Redemption and roll over

The issuer shall redeem the securities as stated inoffer document.If the issuer wants to roll over the debt securities it

shall do only by passing a special resolution ofholders21 days notice should be also be given to holdersThe notice shall contain disclosures with regard tocredit rating and purpose behind roll overBefore issuing the notice the issuer needs to sendnotice to its designated stock exchange.


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Redemption and roll over

The debt securities issued can be rolled over subject tothe following conditions :-

The roll over is approved by a special resolution through postal ballot The consent of atleast 75% holders need to be obtained credit rating should be obtained before six months ofredemption Fresh trust deed needs to be executed after issue

Adequate securities should be there.The issuer shall redeem the debt securities whoseconsent is not obtained.


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Advertisements for public issue

The issuer should make advertisement in a nationaldaily newspaper

No issuer shall issue an advertisement which is

misleading or contains any manipulative informationThe advertisement should be fair and should not bemisleadingThe advertisement shall not contain any matters whichare extraneous to offer documentThe advertisement shall urge the investors to investonly on the basis of information contained in the offerdocument.


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LISTING OF DEBTSECURITIES BY SEBIREGULATIONS, 2008


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Mandatory listing

Issuer shall make an application for listing to one ormore recognized stock exchanges.

Issuer shall comply with conditions of listing of suchdebt securities as specified in the Listing Agreementwith the stock exchange.


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Conditions for listing on privateplacement basis.

Issuer may list its debt securities on a recognized stockexchange within 15 days of the date of its allotment.Issuer has issued such debt securities in compliance

with the provisions of the Companies Act,1956.Credit rating has been obtained in respect of such debtsecurities from at least one credit rating agencyregistered with the Board.Debt securities proposed to be listed are indematerialized form.Issuer shall comply with conditions of listing of suchdebt securities as specified in the Listing Agreementwith the stock exchange where such debt securities are

sought to be listed.


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Disclosures in respect of PrivatePlacements of Debt

The issuer shall make disclosures as specified inSchedule I of these 8 Securities regulations

accompanied by the latest Annual Report of the issuer.

The disclosures as provided in mandatory listing shall be made on the web sites of stock exchanges wheresuch securities are proposed to be listed and shall beavailable for download in PDF / HTML formats.


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Continuous Listing Conditions

Debenture trustee shall disclose the information to theinvestors and the general public by issuing a pressrelease in case of-

default by issuer to pay interest on debt securities orredemption amount;failure to create a charge on the assets;revision of rating assigned to the debt securities.

The information shall also be placed on the websites, ifany, of the debenture trustee, the issuer and the stockexchanges


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Trading of Debt securities

The debt securities which are listed in recognized stockexchanges, shall be traded and such trades shall becleared and settled in recognized stock exchanges

subject to conditions specified by the Board.

In case of over the counter trades of debt securities,trades shall be reported on a recognized stock exchangehaving a nation-wide trading terminal or such other

platform as may be specified by the Board.


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Information to be displayed on theWebsite

Memorandum and Articles of Association andnecessary resolution(s) for the allotment of the debtsecurities.Copy of last three years audited Annual Reports.

Copy of the Board / Committee Resolution authorizingthe borrowing and list of authorized signatories.Any other particulars or documents that therecognized stock exchange may call for as it deemsfit.An undertaking that permission/consent from theprior creditor for a second or pari passu chargebeing created.


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Obligations of Debenture Trustee

Debenture trustee shall prior to the opening of the publicissue, furnish to SEBI a due diligence certificate.Debenture trustee shall be vested with the requisite powersfor protecting the interest of holders of debt securitiesincluding a right to appoint a nominee director on theBoard of the issuer in consultation with institutional holdersof such securities.Debenture trustee shall ensure disclosure of all material

events on an ongoing basis.Supervise the implementation of the conditions regardingcreation of security for the debt securities and debentureredemption reserve


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Obligations of various parties

Company ensure that all the material facts distributedto the public are true, fair and adequate and there isno mis-leading or untrue statements or mis-statementin the offer document.

The Merchant Banker shall ensure verify and confirmthe same.In respect of assignments undertaken for issue, offerand distribution of securities to the public the

intermediaries shall be responsible for the duediligence.The Company and the merchant banker shall ensurethat the security created to secure the debt securitiesis adequate to ensure 100% asset cover for the debtsecurities.


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Capital & Disclosure Req.

Conversion of Optionally Convertible Debt Instruments into Equity ShareCapital

Restriction - An issuer cannot issue convertible debt instruments for

financing replenishment of funds or for providing loan to or for acquiringshares of any person who is part of the same group or who is under thesame management

Minimum Promoters Contribution - Promoter have to contributeminimum 20% either by equity or convertible securities

Auditors Certificate - Issuer have to forward the details of utlization offunds raised through convertible debtuture duly certified by statutory

auditors.


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FEMA GUIDELINES ONCOMPULSORILYFULLY CONVERTIBLEDEBENTURE


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FEMA Guidelines

Entry routes for investments in India

Automatic Route

Government Route

Fully and Mandatorily Convertible Debentures

The transaction between resident and non-resident are regulated by FEMA,1999 (FEMA) and FDI Policy.

Pricing for issue of Fully and mandatorily Convertible Debentures shall be:

Listed Companies - as per SEBI (ICDR) RegulationUnlisted Companies - not less than fair value of shares determined by aSEBI registered Merchant Banker or a Chartered Accountant as per theDiscounted Free Cash Flow Method (DCF)


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FEMA Guidelines

Maximum Permissible Amount- Sectoral Cap s prescribed under FDI policy

Appointment of debenture trustee- Is not Mandated if the conversionhappen in 18 months. Othervise appointed by company to which SEBI

Regulations applicable.Maturity Period- No minimum or maximum conversion period provided

by law

End use of funding- It cannot be raised by the entity which is engages or purpose of engage in the following activities

Business of chit fund, or

Nidhi company, or

Agricultural or plantation activities, or

Real estate business, or construction of farm houses, or

Trading in Transferable Development Rights (TDRs).


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FEMA Guidelines

Taxation - Tax liability shall be governed by the Indian Income Tax Act, 1961. incase countries with which India double taxation avoidance agreement then DTAAapplicable

Compliance Requirements:

Ensure that Articles of the Company allows issue of debentures, if not then

alter articles of association by passing Special ResolutionDrafting of Investor Agreement

Board Resolution under Section 292(1)(b) [certain powers to be exercised by board only at meeting] of the Companies Act, 1956

In case of Public Company, borrowing should not exceed aggregate of paid-

up capital and free reserve as per Section 293(1)(d) [borrowing section]Board Resolution for allotment of Debentures. It has to be allotted within 180days of receipt of funds)

Issue of duly signed, stamped and sealed Debenture Certificate to Investor

Advance Reporting for receipt of funds


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COMPARISON OF

COMPANIES ACT 1956 &2013

Applicable to Debt Market

I f D b C i


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Issue of Debenture -ConversionOption

Companies Act 1956:

No such requirementexisted.

Companies Act 2013:Section 71(1)

Needs special resolutionof members for the issueof debentures withconversion option

wholly or partly.

S i 117 D b V i


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Section 117 : Debenture VotingRights

No company can issue the debenture caring votingrights.

New Companies Act 2013 does not mention anychange on this aspect.

.


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Debenture Trust Deed

Companies Act 1956:Section 117A

Document containing provisiondealing with the right of thedebenture holders & company.

Copy of trust deed shall be open toinspection to any member ordebenture holder.

If Copy not made available forinspection then the company &every officer of the company shall

be punishable.

Companies Act 2013:Section 71

Does not specify specifically about thetrust deed.

Consider that the trust deed is already present.

Central government may prescribe theform of debenture trust deed

.


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Duties Of Debenture Trustee

Companies Act 1956:Section 117B

Ensure that the company does notcommit any breach of covenantsand provisions of the trust deed.

Ensure each of guarantors aresufficient to discharge the

principle amount at all times.

If Trustee comes to conclusion ofassets of the company areinsufficient to discharge the

principle, file a petition beforeCentral Government

Companies Act 2013:Section 71 (5 & 6)

Other duties are similar as per old act.

All the petition may file by trustee infront of Tribunal, as it was only incase of Sick industrial company.

.


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Debenture Redemption Reserve

Companies Act 1956:Section 117C

Create DRR out of its profitevery year until the debentures

are redeemed

DRR amount shall not beutilised for other purpose

If defaulted every officer ofcompany shall be punishablewith imprisonment till 3 years& fine not less than Rs. 500/-for every day till defaultcontinues.

Companies Act 2013:Section 71 (4)

Creation of DRR is similar toold act

If defaulted every officer ofcompany shall be punishablewith imprisonment till 3 yearsor fine shall not be less thanRs. 2 Lakh & extended to Rs. 5Lakh or Both punishment

.


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Perpetual Debentures


No date of redemption isspecified

Debenture holder can notredeem their debenture

Due for redemption only ifCompany fail to pay interestOr on winding up of thecompany

Companies Act 2013:Section 71 (13)

Does not specifyspecifically about the

perpetual debenture in act.

.

Specific Performance Of Contract


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Specific Performance Of ContractTo Subscribe For Debentures


It is a contract to take up or pay for any debenture ofcompany

Only enforced by degree ofspecific performance

.


Does not mention anyclause on this aspect.

.


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STAMP DUTY REQUIREMENT


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Stamp Duty Requirement

Payable on transfer of Marketable SecuritiesBy endorsement or by separate instrument of transferBy delivery

Indian Stamp Act, 1899 Section 2(16A)Marketable securities is defines as securities capable

of being sold in any stock market in India


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Stamp Duty Requirement

Rates of stamp duty are as per Indian stamp act 1899,article 27

In 2008, Ministry of finance amended the act to paystamp duty as prescribed by Central Government.

Companies need to pay the stamp duties prescribed byCentral government

At rate of 0.05% per year of the face value of the debenture,Max 0.25%,Or Rs. 25 Lakh, whichever is lower


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UNSECURED DEBENTURES


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Unsecured Debentures

Companies may also issue Unsecured/ subordinateddebt instrument/obligation.

Subscribed byQualified Institutional InvestorsOther who have given positive consent for subscription

Debenture having maturity less than 18 months No need of creating mortgage & appoint Debenture trustee.Facility of creating charge on assets of company.


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Unsecured Debentures

Such debentures are treated as Deposits

Has to comply with provision of companies act ofacceptance of Deposit

Companies act 2013 section 73 No Company can invite, accept or renew depositsBy passing a resolution in general meeting & Prescribed

with consultation of RBI, company can accepts depositAs this to be quoted as unsecured deposits in everycircular, form, advertisement or documents related toinvitation.


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PUBLIC OFFER FOR SECURITIZEDDEBT INSTRUMENTS UNDER SEBIREGULATIONS,2008


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Public Offer

The SPDE i.e. issuer shall be in the form of a trust.

No registration from SEBI to act as such shall be

required in certain cases

The securitized debt instruments shall acknowledgethe interest of the investors

Originator shall be an independent entity from theissuer


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Listing agreement

Purpose of the listing agreement for securitized debtinstruments

The Listing Agreement places the burden of disclosures

on the Special Purpose Distinct Entity (SPDE)

The Highlights of the Listing Agreement for SecuritizedDebt Instruments

- Certain points are required of the SPDE including


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Listing agreement

-The SPDE shall ensure timely interest/redemption payment

-The SPDE will not forfeit unclaimed interest and principal

-The SPDE has to designate any person as Compliance Officer whowill have certain responsibilities

- The SPDE requires to credit the demat accounts of the allotteeswithin two working days from the date of allotment

- The SPDE either by itself or through the sponsor, pay to theExchange fees as prescribed by the Exchange as soon as itssecuritized debt instruments are listed on the Exchange


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Listing agreement

-The SPDE either by itself or through the sponsordeposit an amount calculated at the rate of 1% of theamount of securitized debt instruments offered forsubscription

-The SPDE undertakes to comply with any regulations,requirements, practices and procedures as may be laiddown by the Exchange

-The SPDE has to comply with the provisions ofcertain relevant Acts


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Listing agreement

-The SPDE either by itself or through the sponsor, pay fees to the exchange

-The SPDE is required to provide at the request ofthe investor or the Exchange, loan levelinformation

-The SPDE need to file information, statementsand reports within specified time


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GOVERNMENT SECURITIESACT 2006


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Government Sec. Act, 2006

Government security - Security created and issued bythe Government for the purpose of raising a public loanor any other purpose as notified by the Government inthe Official Gazette.

Transfer of Government security Government Promissory Note - transferable byendorsement and delivery

bearer bond - transferable by deliverySC, SGL/CSGL and BLA - transferable, before maturity, byexecution of forms - III, IV and V respectively.


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Nomination/deceased/minor

Nomination facility for a Government security other than inthe form of GPN and bearer bond.Sole holder or all the joint holders of such a Governmentsecurity may nominate one or more persons.

Nominee, as an individual or institution, should be eligible toinvest in the particular loan as per the specific GovernmentLoan Notification.Either or any of the nominees is dead, the surviving nomineeor nominees will be entitled to the Government security and

payment thereonA minor can be a nominee, but appointment of anotherindividual, not a minor is must.


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Limitation of Government's liability

Liability of the Government in respect of any interest payment due on a Government security shall terminateon the expiry of six years from the date on which theamount due by way of interest became payable.Investors are expected to claim interest on theirGovernment security within six years from the date it

becomes payable

But, the Government may allow a bonafide claim for payment of interest even after the expiry of thelimitation period of six years.


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RBI GUIDELINES ON ISSUE

OF GOVERNMENTSECURITIES


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RBI guidelines

Eligibility for investments

Investment by any person including

Firms

Companies

Corporate bodiesInstitutions

State Governments

provident funds

Trusts

Non-Resident Indians, Overseas Corporate Bodies and Foreign InstitutionalInvestors registered with SEBI and approved by RBI are also eligible

Investment by a person resident outside India shall be subject to the provisionsof FEMA


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Minimum Subscription Minimum amount of Rs.10000/- (Face Value) and inMultiplies of Rs. 10000 thereafter

Payment for Government Securities Payment shall be made by the applicants/investors on

such

dates as mentioned in the Specific Notification

RBI guidelines


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Repayment of Government Securitiesrepaid at Public Debt Offices of the Reserve Bank of India

Transferability of Government Securities The transfers by FIIs will be subject to SEBI(FIIs') Regulations transfers by NRIs and OCB will be subject to RBI

guidelines

RBI guidelines


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RBI guidelines on issue of G-


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Modes of issue of Government Securities

Issue of Securities through auction.

Issue of Securities with pre-announced couponrates.Issue of Securities through tap sale.Issue of Securities by conversion of treasurybills/dated securities

RBI guidelines on issue of G-sec


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FIMMDA[FIXED INCOME MONEYMARKET AND DERIVATIVES

ASSOCIATION OF INDIA]

FIMMDA


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FIMMDA

The Fixed Income Money Market andDerivatives Association of India (FIMMDA) isan association of Scheduled Commercial

Banks, Public Financial Institutions, PrimaryDealers and Insurance Companies.It was incorporated as a Company undersection 25 of the Companies Act, 1956 onJune 3rd, 1998.FIMMDA is a voluntary market body for thebond, money and derivatives markets.

R l f FIMMDA


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Role of FIMMDA

It acts as principal interface with regulators like RBI,SEBI, GOIIt is Mandated by RBI for valuation of GovernmentBonds, Corporation bond.Undertakes developmental activities such asintroduction of benchmark and new index.Suggests legal & Regulatory Framework fordevelopment of new productsTraining and Development support to debt marketStandardization of market practices


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GUIDELINES FOR DEBTSEGMENT ON STOCKEXCHANGE, 2013

D bt S t St k E h 2013


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Debt Segment on Stock Exchange, 2013

Debt Segment is traded on OTC mandatory reported onFIMMDA, BSE and NSE.

Debt market lacks proper infrastructure and that is whydedicated debt segment on stock exchange is proposed.

It shall offer separate trading, clearing, settlement, reportingfacilities and membership.

Stock exchange who wants to set up debt segment need tomake application to SEBI .

Framework for Debt Segment


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1. Listingo Debt securitieso Government Securities, Treasury Bills, State Government loans, SLR and

Non-SLR Bonds issued by Financial Institutions, municipal bonds, single bond repos, basket repos and CBLO kind of products subject to RBIapproval, where required;

o Securitized debt instrumentso Any other debt instruments

2. Tradingo Offer Electronic screen based trading, internet trading, mobile tradingo Retail Market publicly issued debt instrumento Institutional Market non publicly issued debt instrument



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3. Clearing and settlemento All trading members shall be clearing member or may clear through a

clearing membero For institutional market trade to be settled on T+1 rolling settlement

o For retail market trade to be settled on T+2 rolling settlement

4. Risk managemento For retail market, uniform margin rate of 10% shall be applicable with AA

ratingo For institutional market, appropriate margin maybe prescribed after

approval by SEBIo Clearing corporation shall specify appropriate risk management for each

market.


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FACTORS AFFECTING

THE DEBT MARKET ININDIA

Factors


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Factors

Growth and inflationRBI Policy

Liquidity

Government Borrowings

Bank Credit-Deposit Growth

Currency/Commodity Market


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CONCLUSION

Conclusion


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Conclusion

Greater transparency RBI has started publishing SGL dataIntroduction of auctions have contributed to the development

bidding skills among investors. Banks are paying specialattention to this sector as profit centers.

Increased focus on treasury management and interest rate riskmanagement.

Larger amounts being raised by the corporate sector


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Law Grp 7 Final