Non Convertible Debentures

Abhilasha KumariCollege of Legal Studies, UPES

B.B.A. LL.B.(Hons.)5th Year

Features•Instrument of loan•No voting rights•Interest paid at a fixed rate•Debenture holders are the creditors of the company carrying a fixed rate of interest.• redeemed after a fixed period of time.• Debentures may be either secured or unsecured.• Interest payable on a debenture is a charge against profit and hence it is a tax deductible expenditure.•Interest on debenture is payable even if there is a loss.

FeaturesTraded on

stock exchanges

Issuance and Trading in

Demat Form

Interest paid through

Direct CreditCredit rating

Tenure of NCDs:

between 2 t 20 years

Types of debenture

On the basis of Convertibility-(A) Non Convertible Debentures (NCD): These instruments retain the debt character and can not be converted into equity shares.(B) Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in the future at notice of the issuer.(C) Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice. (D) Optionally Convertible Debentures (OCD): The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue.

On the basis of Security-

(A)Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company

(B) Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults on payment of the interest or principal amount, the investor has to be along with other unsecured creditors of the company

On the basis of Redeemability- (A)Redeemable Debentures: It refers to the

debentures which are issued with a condition that the debentures will be redeemed at a fixed date or upon demand, or after notice, or under a system of periodical drawings.

(B) Perpetual or Irredeemable Debentures: A Debenture, in which no time is fixed for the company to pay back the money, is an irredeemable debenture.

On the basis of Registration-

(A) A Registered Debentures: Registered debentures are made out in the name of a particular person, who is registered by the company as holder on the Register of debenture holders. (B) Bearer debentures: Bearer debentures on the other hand, are made out to bearer, and are negotiable instruments, and so transferable by mere delivery like share warrants.

BROAD REGULATORY FRAMEWORK FOR DEBT SECURITIES

(a) SEBI (ICDR) Regulations 2009(b) Listing Agreement for Debentures issued through public issue/Rights issue.(c) Listing agreement for privately placed Debentures(d) SEBI (Issue and Listing of Debt Securities) Regulations, 2008(e) SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008(f) The Companies Act, 2013(g) Companies (Share Capital and Debentures) Rules, 2014

Procedure for redemption of debentures

Board Meeting Intimation to Debenture holder Refund

Entries in Register of Debenture

holder

Changes in Register of

charges

Intimation to Registrar of Companies

Key parameters of NCD

Coupon rate

• The interest rate payable to the investor

Face value

• The nominal value of NCD stated by the issuer

Redemption

• The return of an investor on principal

Market value

• The last reported sale price

Yield

• The annual returns on an investment expressed as percentage.

Key pointsSection 2 (30) of the Companies Act, 2013 define inclusively debenture.Section 44- debenture as movable property.create a DRR account out of the profits of the company An issue of debenture for more than five hundred members or any number of public without creating a debenture trust is prohibited.No company shall issue any debentures carrying any voting rights.

Private placementSection 42 dealing with Offer or invitation for subscription of securities on private placement.Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 dealing with Private Placement.Rule 18(7) (b) (ii) of Companies (Share Capital and Debentures) Rules, 2014, no DRR is required to be maintained by NBFCs. Rule 14(5) exempts NBFCs from complying with limit of number of persons and minimum investment size limit.

Contd.

Acceptance of Public Deposits (Reserve Bank) Directions, 1998. new clause (fa) under para 2(xii)(f) Category B NCDs issued with a maturity of one year and above, in accordance with the guidelines issued by RBI from time to time will not be covered under public deposit.

DEPOSITS(Chapter V, Sections 73-76 and Companies

(Acceptance of Deposits Rules), 2014)

•Allows acceptance of deposits from members and public•Private company can accept only from members and directors •Resolution of shareholders required•Issuance of circular to members with statement of financial position, credit rating obtained, outstanding amount of previous deposits•Deposit Repayment Reserve Account in a separate bank account•Amount of deposit or any part thereof or any interest due thereon remains unpaid on the commencement of the Act or becomes due thereafter – file of statement with RoC and repay within one year.

Issue of NCDs by private placement (NBFCs)

RBI Circular- DNBR (PD) CC No.021/03.10.001/2014-15

2 categories:a) With a maximum subscription of less than Rs. 1 crore (Category A)b) With a minimum subscription of Rs. 1 crore and above

Eligibility criteria to issue the NCDs of less than one year

•Having a tangible net worth as per the latest audited balance sheet, of not less than Rs.4 crore;

•been sanctioned working capital limit by bank/s or all-India FIs; and

•The borrowing account of the company is classified as a Standard Asset by the financing banks/ institutions.

• valid credit rating of P-2 or equivalent for the issue from one of the rating agencies specified by Reserve Bank of India from time to time, for the purpose.

Zero coupon bonds: - refer to those bonds which are sold at a discount from its eventual maturity value and have zero interest rate.

Deep discount bond:- It refers to those bonds which are sold at discount value by the company and on maturity face value is paid to the investors.

Debenture trustee

• SEBI (Debenture trustees) Regulations, 1993•Sec 2(bb)- definition of “debenture trustee”•Regulation 3- Registration•Regulation 15- Duties of DT

Role of Debenture trustees

•Enforce security in the interest of the debenture holders

•protecting the interest of the debenture holders

•Exercise due diligence to ensure compliance by the body

corporate

•Take possession of trust property

Tax implications

NO TAX DECUSTION AT SOURCE- section

193 of IT act.

This however does no t mean that

investor does not need to pay any tax

on the interest earned

There can be capital gains if you sell NCDs

before maturity

Stamp duty implications

Unlisted debentures

aren't considered as

marketable security- No stamp duty.

Entry 91 of List I, only the Central Government has

power to levy stamp

duty on issue of debentures.

The State Government can levy stamp duty only on transfer of debentures.

Under Article 27 and 62 of

Schedule I to the Indian Stamp

Act, 1899.

at the rate of .05% per year of the face value

of the debentures,

subject to the maximum of

0.25% or Rs 25 lakh, whichever

is lower.

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