NCD Issuance and Listing by Listed Entities: Regulatory Framework & Procedure

Summary: Non-Convertible Debentures (NCDs) issued by a listed entity are governed by multiple layers of law covering issuance, private placement, debenture requirements, regulatory disclosures and listing obligations. The framework principally comprises the Companies Act, 2013, the Companies (Share Capital and Debentures) Rules, 2014, the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, with an additional RBI layer applicable to NBFC issuers. Before issuance, the company must satisfy conditions relating to identified allottees, defaults, debenture trustees, borrowing limits, subscription accounts and credit ratings. The procedure then progresses through identification of allottees, preparation of PAS-4 and the Placement Memorandum, board approvals, trustee appointment, ROC filings, allotment, PAS-3 filing, ISIN allotment, demat credit and stock exchange listing. The note also addresses Debenture Redemption Reserve requirements and the exemptions available to listed companies, NBFCs and Housing Finance Companies. Once NCDs are listed, additional requirements include mandatory listing, merchant banker and registrar appointments where applicable, creation of the Recovery Expense Fund and continuing disclosure obligations under the LODR Regulations. The framework is intended to ensure compliant issuance and listing while protecting investor interests.

Introduction

Non-Convertible Debentures (NCDs) are debt instruments that cannot be converted into equity shares and are typically issued by companies to raise funds for working capital, capital expenditure, or refinancing, while offering investors a fixed rate of return over a defined tenure. For a listed entity, the issuance of NCDs is not a one-step transaction — it moves through board approval, regulatory filings, trustee appointment, and, where the debt is to be listed, exchange-level compliances under SEBI’s regulatory framework.

This note sets out the regulatory framework, the pre-conditions for issuance, the step-by-step procedure for issuance and listing, and the additional compliances that apply once the NCDs are listed — with the relevant statutory provision cited against each requirement, so it can be used as a working reference during a live transaction.

Regulatory Framework of Issuance and Listing of Non-Convertible Debentures by a Listed Entity

The issuance and listing of NCDs by a listed company draws from four layers of law, each governing a different part of the transaction:

Companies Act, 2013 — Sections 42, 71, 179 and 180

Section 42 governs the private placement route itself, including the 200-person cap in a financial year. Section 71 deals with debentures generally, including the power to create a charge and the requirement to appoint a debenture trustee where the offer is made to more than 500 persons. Section 179 sets out the powers exercisable only by resolution passed at a board meeting, and Section 180 restricts a company’s borrowing powers beyond its paid-up capital and free reserves without shareholder approval.

Companies (Share Capital and Debentures) Rules, 2014 — Rule 18

Prescribes the manner of appointment of a debenture trustee, the contents of the Trust Deed, and the conditions for creating a Debenture Redemption Reserve.

SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021

Governs the disclosure requirements in the Placement Memorandum (Schedule I), the credit rating requirement (Regulation 10), and the Recovery Expense Fund (Regulation 11).

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 — Regulation 62A

Mandates listing of all non-convertible debt securities proposed to be issued by a listed entity on or after 1 January 2024, and requires any previously unlisted debt issued on or after that date to be listed within three months of any subsequent listing. The insertion of Regulation 62A was made through the SEBI (Listing Obligations & Disclosure Requirements) (Fourth Amendment) Regulations, 2023.

Additional Layer for NBFC Issuers

Where the issuer is an NBFC, a fifth layer applies — the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023, which governs borrowing limits and exposure norms relevant to the quantum of the NCD issue.

Conditions for Issuance of Non-Convertible Debentures

Before the first board notice goes out, a few conditions have to be satisfied — skipping any of these is what usually causes a re-filing later:

The offer must be made to identified persons not exceeding 200 in a financial year, excluding Qualified Institutional Buyers and employees under a stock option scheme. Source: Section 42(2), Companies Act, 2013.

The company must not have made any default in the repayment of deposits or interest, unless the default has been made good and a period of five years has elapsed. Source: Rule 18(2)(b), Companies (Share Capital and Debentures) Rules, 2014.

Where the offer is made to more than 500 persons, a debenture trustee must be appointed and a Trust Deed executed before the issue. Source: Section 71(3), Companies Act, 2013.

The borrowing, together with the proposed NCD issue, must not exceed the company’s paid-up share capital, free reserves, and securities premium, unless approved by shareholders through a special resolution. Source: Section 180(1)(c), Companies Act, 2013.

A separate bank account must be opened to receive subscription monies, to be used for no purpose other than adjustment against allotment or refund. Source: Section 42(6), Companies Act, 2013.

A credit rating must be obtained from at least one SEBI-registered credit rating agency and disclosed in the offer document. Source: Regulation 10, SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

Stepwise Procedure for Issuance and Listing of Non-Convertible Debentures

Step 1: Identification of Proposed Allottees

Identification of proposed allottees and collection of their PAN and demat details. Source: Section 42(2), Companies Act, 2013 read with Rule 14, Companies (Prospectus and Allotment of Securities) Rules, 2014.

Step 2: Drafting of Form PAS-4

Drafting of Form PAS-4, the Private Placement Offer-cum-Application Letter. Source: Section 42(3), Companies Act, 2013.

Step 3: Opening of Dedicated Bank Account

Opening of a dedicated bank account for subscription proceeds. Source: Section 42(6), Companies Act, 2013.

Step 4: First Board Meeting Notice

Issuing notice of the first board meeting to every director at least seven days in advance, with agenda, notes, and draft resolutions. Source: Secretarial Standard-1 (SS-1), issued by ICSI under Section 118(10), Companies Act, 2013.

Step 5: Preparation of Placement Memorandum

Preparation of the Placement Memorandum with the Schedule I disclosures, for application to the stock exchange for In Principle Approval. Source: Schedule I, SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

Step 6: Appointment of Debenture Trustee

Appointment of the debenture trustee, obtaining consent, and drafting the Trust Deed. Source: Rule 18, Companies (Share Capital and Debentures) Rules, 2014.

Step 7: Board Approval

Board approval of the offer terms, Form PAS-4, trustee appointment, Trust Deed execution, the dedicated bank account, and, where necessary, enhancement of borrowing limits. Source: Section 179(3), Companies Act, 2013.

Step 8: Filing of Form MGT-14

Filing of Form MGT-14 with the ROC within 30 days of the board resolution, and a second filing within 30 days of any special resolution for enhanced borrowing limits. Source: Section 117(3), Companies Act, 2013.

Step 9: Dispatch of Form PAS-4

Dispatch of Form PAS-4 with the Placement Memorandum and attachments to identified allottees. Source: Section 42(3), Companies Act, 2013.

Step 10: Second Board Meeting Notice

Notice of the second board meeting, at least seven days in advance, to approve allotment. Source: SS-1, issued by ICSI.

Step 11: Board Approval of Allotment

Board approval of allotment, authorisation to sign debenture certificates, execution of the Trust Deed (Form SH-12), and the DRR position. Source: Section 179(3), Companies Act, 2013 read with Rule 18, Companies (Share Capital and Debentures) Rules, 2014.

Step 12: Filing of Form PAS-3

Filing of Form PAS-3 with the ROC within 15 days of the allotment resolution. Source: Section 42(9), Companies Act, 2013.

Step 13: Application for ISIN

Application to the Depositories (NSDL/CDSL) for allotment of an ISIN. Source: Depositories Act, 1996 read with SEBI (Depositories and Participants) Regulations, 2018.

Step 14: Credit of NCDs to Demat Accounts

Credit of NCDs to allottees’ demat accounts through a corporate action. Source: NSDL/CDSL Bye-laws.

Step 15: Application for Listing

Application for listing to the recognised stock exchange. Source: Regulation 28, SEBI (LODR) Regulations, 2015.

Debenture Redemption Reserve and Exemption

This is the section I find gets summarised loosely more often than any other. Section 71(4) of the Companies Act, 2013, read with Rule 18(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014, requires a company issuing redeemable debentures to create a DRR of a prescribed percentage of the outstanding value of the debentures, to be maintained until redemption.

However, the Companies (Share Capital and Debentures) Amendment Rules, 2019 exempted the following categories from creating a DRR:

Listed companies

NBFCs registered with the Reserve Bank of India

Housing Finance Companies registered with the National Housing Bank

The point I would flag for anyone drafting a board note on this: the exemption applies to both public issue and private placement of debentures — it is not restricted to private placement alone. For a listed NBFC issuing NCDs, whether secured or unsecured, DRR does not enter the compliance picture at all, provided the exemption conditions continue to be met at the time of issue.

Additional Compliances for Listing of Non-Convertible Debentures

Listing brings its own layer of compliance, over and above the issuance procedure:

Mandatory listing of all NCDs proposed to be issued on or after 1 January 2024, and listing of previously unlisted outstanding NCDs within three months of any subsequent listing. Source: Regulation 62A, SEBI (LODR) Regulations, 2015.

Appointment of a merchant banker, where the issue is a public issue. Source: SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

Appointment of a Registrar and Share Transfer Agent. Source: SEBI (Registrar to an Issue and Share Transfer Agents) Regulations, 1993.

Creation of the Recovery Expense Fund, equal to 0.01% of the issue size subject to a maximum of Rs. 25 lakh per issuer, deposited with the designated stock exchange before the application for listing. Source: SEBI Circular SEBI/HO/MIRSD/CRADT/CIR/P/2020/207 dated 22 October 2020, effective 1 January 2021, read with Regulation 11, SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

Continuous disclosure obligations post-listing, including half-yearly financial results and asset cover certificates, as applicable to the listed entity under the LODR Regulations. Source: SEBI (LODR) Regulations, 2015.

Conclusion

The issuance and listing of Non-Convertible Debentures by a listed entity is governed by a well-defined framework under the Companies Act, 2013, the Companies (Share Capital and Debentures) Rules, 2014, and SEBI’s regulations on non-convertible securities and listing obligations. Compliance at each stage — from board approval and ROC filings to trustee appointment, credit rating, and exchange listing — ensures that the issuance is legally valid and that investor interests are adequately protected. A clear understanding of the applicable provisions, the conditions for issuance, and the exemptions available (such as for the Debenture Redemption Reserve) allows a company to raise debt through NCDs in a compliant and efficient manner.