RBI Guidelines on Private Placement of Debentures by NBFCs – Part 1

          [The following post is
contributed by Nidhi Ladha and Vinita Nair of Vinod Kothari & Co. They can
be contacted at nidhiladha@vinodkothari.com and vinita@vinodkothari.com respectively]
Non Banking
Financial Companies (NBFCs) raise money through the issuance of capital/debt
securities (including debentures) by way of public issue or private placement.
Lately, a substantial increase in borrowings of NBFCs has been witnessed by way
of issue of debentures being on private placement basis. As per RBI’s report on
and Progress of Banking in India
’, 2011-12, NBFCs-D have borrowed Rupees
238 billion by issue of debentures during the year 2011-12 and Rupees 2950
billion has been raised by NBFC-ND-SI during the same period. Such debentures
consisted of both secured and unsecured issues.
The reason
for huge borrowing by way of issue of debentures may be that the extant
guidelines may not be strict enough. The public issues of debentures by public
NBFCs are governed by SEBI (Issue and Listing of Debt Securities) Regulations,
2008. However, there were as such no guidelines for issue of debentures on
private placements by public or private NBFCs. Moreover, the limit of 49
subscribers for a private offer as envisaged by section 67 of the Companies
Act, 1956 was not applicable to the NBFCs.
with the intent to regulate the privately placed issues of debentures by NBFCs
and to ensure minimum compliances, RBI vide Notification No. RBI/2012-13/560 DNBD (PD) CC No.
dated 27th June, 2013 (the Notification) has inter-alia issued Guidelines on Private Placement of securities by NBFCs (the
). The Guidelines shall come into existence with immediate effect
from the date of the Notification. Further, RBI vide Notification No.
DNBS(PD) CC No.349/03.10.001/2013-14[2]
dated 2nd July, 2013 (the Clarification)  has issued Clarifications subsequent to
receipt of number of queries from the industry in this matter.
In this post, we have discussed the issue of debentures on private
placement basis only.



Guidelines seem to have been issued against the backdrop of the recent ruling of
the Supreme Court
in Sahara Real Estate Corporation (Sahara case)
pertaining to raising of money by issue of OCDs which were issued on “private
placement basis”, wherein nearly Rs 20,000 crores of money had been raised,
from 22.1 million investors, using services of nearly a million agents, at 2900
branches. And all these were regarded to be a private placement. In view of
such adverse features brought to the notice of RBI, wherein NBFCs have been
raising resources from the retail public on a large scale, through private
placement, especially by issue of debentures, RBI has issued the guidelines
overriding other instructions in this regard, wherever contradictory.

The purpose behind issuing
the Guidelines was due to the practice followed by NBFCs to raise funds through
the issue of NCDs without any restriction. This reflected their inadequate
resource planning and resulted in higher transaction cost. Taking away the
current facility of issuing NCDs and implementing the minimum time gap
requirements between two issues will surely lead to Asset Liability Mismatch
(ALM). In view of the same, as per the Clarifications, RBI has directed NBFCs
to formulate a Board approved policy for resource planning, covering the
planning perspective and periodicity of private placement, before close of
business on September 30, 2013.

Highlights of
the Guidelines

– Number of subscribers
for issue of securities on private placement basis has been restricted to 49
overriding section 67 (3) of the Companies Act.
– Names of the
subscribers to be identified upfront in case of private placements
– NBFCs to issue secured
debentures only. If the security cover is not sufficient at the time of making
issue, sufficient security to be created within 1 month and till then issue
proceeds are to be kept in escrow account
– Minimum time gap of 6
months between two private placements.

Provisions of Law Applicable to Private Placement of Debentures by
NBFCs Prior to and Post Issue of the Guidelines:


Companies Act, 1956 (“Companies Act”) and
Rules framed thereunder

Section 67: Provision relating to ‘deemed
public offer’
67(3) of the Act providing for ‘deemed public offer’ if the issue of securities
is to 49 people or more was not applicable to NBFCs
However, the Guidelines have restricted
the private placements to a maximum of 49 people and all such subscribers are
to be identified upfront in case of private placement. Therefore, even if the
Companies Act exempts NBFCs from the provision of ‘deemed public offer’, RBI
has put a cap of 49 subscribers for issue by private placement.
It is
pertinent to note that the Guidelines covers the issue of shares also and
therefore even the issue of shares to more than 49 people will be a public
offer as per the Guidelines.
Section 117C of the Companies Act
requiring DRR
Section requires every company
issuing debentures to create a debenture redemption reserve (“DRR”) for the
redemption of such debentures and transfer an ‘adequate’ amount from its profits every year to such DRR until the
issued debentures are redeemed. However, as per Ministry of Corporate Affairs
clarification circular on February 11, 2013[3],
no DRR is required to be maintained in case of privately placed debentures by
Section 125 of the Companies Act requiring
registration of charges
Guidelines makes this very clear that the non convertible debentures including
short term, to be issued by an NBFC should be fully secured at the time of
issue and such security is to be maintained during the whole tenure of the
issued debentures. In terms of NBFCs (Acceptance of Public Deposit) Directions,
1998, debentures should be secured by mortgage of immovable property or any
other asset of the issuer company. Security created by way of mortgage of
immovable property would require registration under this section.
Unlisted Public Companies (Preferential
Allotment) Rules, 2003 as amended from time to time:
These rules
apply to all unlisted public companies in respect of preferential issue of
shares or any other instrument convertible into shares including hybrid
instruments convertible into shares on preferential basis.
NBFCs, which are unlisted public companies, raising money through preferential
allotment of convertible debentures are required to comply with these rules.
The issue of unsecured privately placed debentures or issue of convertible
debentures by private companies shall be governed by the Guidelines.

SEBI Regulations

SEBI (Issue and Listing of Debt Securities)
Regulations, 2008
regulations are applicable to-
(a) public
issue of debt securities; and
(b) listing
of debt securities issued through public issue or on private placement basis on
a recognized stock exchange.
these regulations shall not be applicable to privately placed debentures unless
the issuer is to get the listing of such debentures.
SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009
regulations will regulate the issue of convertible debentures on preferential
basis by listed NBFCs.


(to be continued)
– Nidhi Ladha & Vinita Nair

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • You have mentioned that Guidelines covers the issue of shares also and therefore even the issue of shares to more than 49 people will be a public offer as per the Guidelines. But as per the clarification issued on 2nd july, 2013, private placement is restricted to NCD and therefore restriction of 49 and 25 lacs will not be applicable to shares of fully convetible Debentures. Please comment

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