Nidhi Ladha and Vinita Nair of Vinod Kothari & Co. They can be contacted at
[email protected] and [email protected] respectively.
is a continuation of a previous post accessible here]
debentures- whether convertible or non convertible, by NBFCs – whether public
or private, listed or unlisted, on preferential basis or on privately placed
basis, shall be governed by the Guidelines and provisions of the Guidelines
shall have an overriding effect on provisions of other laws, if found
contradictory with each other.
of Non-Convertible Debentures (Reserve Bank) Directions, 2010
Debenture (NCD) issued by a corporate
(including NBFCs) with original or initial maturity up to one year and issued
by way of private placement.
needed under the Guidelines:
of 6 months from the date of the Board Resolution authorizing the issue.
designations of the authorized officials and must contain information on
purpose for which resources are being raised.
Only” should be printed or typed on the same.
issue should be clearly mentioned.
shall be issued by NBFCs only for deployment of funds on its own balance sheet
and not to facilitate resource requests of group entities/ parent company /
placement shall be done only to 49 investors identified upfront by NBFCs.
subscription amount for a single investor shall be Rs. 25 lakh and in multiples
of Rs.10 lakh thereafter.
time gap of at least six months between two private placements was envisaged by
the Guidelines. However, the Clarification has made this clear that this
condition is to be complied with as and when so notified by the RBI.
of Secured Debentures: NBFCs to issue only fully secured debentures. If, at the
stage of issue, in case of insufficient security cover, the same needs to be
created within one month from the date of issue and till then the issue
proceeds shall be placed under escrow.
issued by RBI to curb the damaging effect of the Guidelines:
NBFCs. This is evident from the quantum of queries and clarifications raised by
the industry resulting in issue of the Clarifications by RBI within 5 days of
issue of Guidelines.
of “Preferential Allotment or Private Placement”
1.1 Position subsequent to issue of
Guidelines – Guidelines encompassed an issue of capital by an NBFC pursuant to
Section 81 (1A) of the Companies Act, 1956
issue of Clarifications – The Clarification suitably restricted the meaning of
private placement to non-public offering of NCDs by NBFCs made to such number
of select subscribers and such subscription amounts as may be specified by the
RBI from time to time
issue of Guidelines – Atleast 6 months between two private placements.
issue of Clarifications – The instruction need not be operationalized immediately.
RBI would decide upon the minimum time gap in due course.
issue of Guidelines – All NBFCs (including Primary Dealers).
issue of Clarifications – All NBFCs (excluding Primary Dealers)
Debentures by NBFCs:
issue of Guidelines – For deployment of funds on its own balance sheet and not
to facilitate resource requests of group entities/ parent company / associates.
issue of Clarifications – The
restriction is not applicable to Core Investment Companies. (CICs)
all debentures issued, including Short Term NCDs.
issue of Clarifications – The
condition shall not apply to subordinated debt, as pursuant to definition
subordinated debt is an unsecured instrument.
to private placement defined as an issue of capital made by an NBFC in
pursuance of a resolution passed under sub-section (1A) of section 81 of the
Companies Act, 1956. Now, only convertible debentures issued by an NBFC will be
requiring approval under Section 81(1A) and definitely not NCDs. So the
Guidelines were originally not applicable to NCDs at all. However, in the
Clarification, RBI simply amended the definition to now include non-public
offering of NCDs by NBFCs to such number of select subscribers and such subscription
amounts, as may be specified by the Reserve Bank from time to time. The excluded instrument of the Guideline
became the main crux of the Clarification. Further, The requirement of
maintenance of security cover at all points of time was initially applicable to
all debentures issued, including short term NCDs. However, realizing that
subordinated debt are primarily unsecured instrument, later excluded the same
in the Clarifications. NBFCs intending to issue unsecured instrument will now
begin exploiting this instrument, as subordinated debt are excluded from the
definition of Public Deposits.
to the NBFC Public Deposit Directions:
2(xii)(f) of the Directions, any amount raised by the issue of bonds or
debentures secured by the mortgage of any immovable property of the company; or
by any other asset or with an option to convert them into shares in the company
were excluded from the definition of public deposits provided that the amount
of such bonds or debentures did not exceed the market value of security.
Further, para 2(xii)(i) of the Directions excludes any amount received as
hybrid debt or subordinated debt with minimum maturity period of sixty months.
the Directions thereby clarifying that only Debentures that are compulsorily convertible into equity or
fully secured would be exempted from the definition of public deposits. Further,
it has been clarified that hybrid debt or subordinated debt would be excluded
if such instruments have been issued with no recall option within the tenure of
the changes notified by the RBI in the definition of ‘Public Deposit’:
amendment – Exemption was to debentures issued with an option to convert them
into shares of the company.
compulsorily convertible into equity
or subordinated debt:
amendment – Exemption was available to hybrid debt or subordinated debt with
minimum maturity period of sixty months.
maturity period of sixty months will be excluded provided no recall option
available to Optionally Convertible Debentures (OCDs) , is a very serious
amendment. NBFCs-ND will now require to mandatorily issue Compulsorily Convertible
Debentures (CCDs), as issuance of OCDs will qualify as Public Deposits.
on existing issues of debentures of NBFCs:
the Guidelines defined the term ‘private placement’ as issue of capital under section 81(1)(A) of the Companies Act,
having an overriding effect on provisions of other laws, if found contradictory
with each other. However, pursuant to the Clarification, the Guidelines will apply
only to non-public offering of Non Convertible Debentures (NCDs) by NBFCs
(excluding Primary Dealers).
Further, there being no clarity on applicability of Guidelines on the
existing issues of debentures, the author’s view is that all NCDs issued after
the date of notification will necessarily have to comply with the Guidelines.
Therefore, there is no need to create security over existing unsecured
debentures in terms of the Guidelines issued by the NBFCs so far. The
Guidelines have come into effect with effect from the notification date i.e.
from June 27, 2013.
of Guidelines to NBFC-CIC:
class of NBFCs which does not require registration with RBI if they fulfill the
prescribed conditions. Such companies are NBFCs but not registered. Applicability
of the Guidelines to such Companies is not clear in the notification issued by
RBI. However, the Guidelines have defined ‘NBFC’ as an NBFC defined in the RBI
Act. It is pertinent to note that the Guidelines do not use the phrases
‘registered as NBFC with the RBI’. Therefore, in author’s view, debentures
issued by CICs shall also be governed by the Guidelines. However, in view of
the Clarification, the restriction pertaining to issue of debentures for deployment
of funds on its own balance sheet shall not apply to CICs.
of Housing Finance Companies (“HFCs”):
are applicable to NBFCs as defined in Section 45 I (f) read with Section 45 I
(c) of the RBI Act, 1934. Therefore, the Guidelines will not be applicable to the HFCs which are registered with NHB.
Guidelines have been issued by RBI with an intent to curb the practice of NBFCs
of raising resources from the retail public on a large scale, through private
placement, especially by issue of debentures and to ensure proper resource
planning to be undertaken by NBFCs. Despite being excluded from the limit of 49
investors under the Companies Act, NBFCs will not be able to privately place
their NCDs with more than 49 investors as per the Guidelines. The stringent
condition requiring sufficient security cover even for privately placed
debentures, including NCDs, will surely affect the NBFCs who primarily raise
money by issue of debentures. However, RBI seems determined to correct the
faulty resource planning of NBFCs and may come up with a circular specifying
the minimum time gap between two private placements too in near future.
– Nidhi Ladha & Vinita Nair