Governing Laws
1. Companies Act, 2013 (the “Act“) with rules made thereunder.
2. Foreign Exchange Management Act, 1999 (“FEMA“)
Provisions as per Act for CCDs in a simple reading format:
For better clarity, we would refer
Company (Pvt. Ltd) as the one proposing to issue Compulsorily Convertible Debentures (CCDs) &
Allottees (foreign shareholders) as the one to whom CCDs will be proposed or proposed allottees
Background:
1. Company proposes to offer compulsorily convertible debentures (”CCDs”) to its existing members i.e. Proposed Allottees on a preferential allotment basis.
2. Issue of debentures are governed by Section 71 of the Act, read with Rule 18 of The Companies (Share Capital and Debentures) Rules, 2014 (”Debenture Rules”)
3. Section 2(30) of the Act defines debentures as: “debenture” includes debenture stock, bonds, or any other instrument of a Company evidencing a debt, whether constituting a charge on the assets of the Company or not.”
4. Subject to Section 2(68)(iii) of the Act, private limited companies are prohibited from making any invitation to the public to subscribe for any securities of the Company. Section 2(h) of Securities Contracts (Regulations) Act, 1956 defines securities to include debentures of a Company.
5. Pursuant to Rule 2(c) of The Companies (Acceptance of Deposits) Rules, 2014 (”Deposit Rules”) a deposit is defined to ”includes any receipt of money by way of deposit or loan or in any other form, by a Company, but does not include (ix) any amount raised by the issue of bonds or debentures secured by first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the Company or bonds or debentures compulsorily convertible into shares of the Company within Ten years.”
Accordingly, in terms of the Deposit Rules: Company being a private Company, can issue CCDs to its members, provided that such CCDs necessarily convert into equity within a point not exceeding ten years from the date of its issue.
Procedure for issuance of CCDs:
| Step | Particulars | What needs to be done (indicative) |
| 1. | Notice for board meeting | Issue notice to convene meeting of board of directors of Company as per prescribed secretarial standard 1. Assuming, there is no restriction in the AOA of Company to hold meeting, such meeting can be convened by giving a notice of seven days. |
| 2. | Convening meeting of Company’s board of directors | In the proposed meeting, following action be taken:
§ approving draft offer letter along with a separate list containing Proposed Allottees details, to whom the CCDs will be offered. § Take note of valuation report for setting out conversion rate for CCDs to equity shares of Company (to be issued by a practicing chartered accountant). § Open separate bank account for receiving subscription money for further issue of CCDs. § To authorize directors of Company to complete all filings with relevant government authorities. § To pass resolution for the approval of notice for calling general meeting of Company shareholders and authorizing Company secretary or directors of Company to issue the same. |
| 3 | Hold extra ordinary general meeting & Filing of MGT-14 | § Approving offer by the shareholders. |
| 4 | Circulate offer letter | § Offer letter accompanied by an application form serially numbered and addressed specifically to Proposed Allottees. |
| 5 | Filing of GNL -2 | § Pursuant to Rule (3) of The Companies (Prospectus and Allotment of Securities) Rules, 2014, PAS-4 and record of private placement offers in PAS-5 have to be filed with the registrar of companies within a period of thirty days of the circulation of offer letter. |
| 6 | Convening meeting of Company board of directors after receiving of application money | § To pass resolution for the allotment of CCDs.
§ To pass resolution for issue of letter of allotment/certificates to the allottees. § Authorizing two directors of Company to sign the certificates. § Approval for filing PAS-3. § Approval for filing FC-GPR. § Approval for filing FIRC. |
| 7 | Filing with the registrar of companies | § Pursuant to Rule 12 of The Companies (Prospectus and Allotment of Securities) Rules, 2014 a return of allotment in PAS-3 within thirty days of the allotment has to be filed with the registrar of companies.
Attachments: a. List of allottees b. Board resolution for allotment c. Valuation report d Copy of special resolution passed. |
| 8 | Issue of certificate | § Entry in the Company’s register of debenture holders shall be made and consequently issue the certificates to the allottees within six months from the date of allotment of CCDS. |
*this article of the author is just for informative purpose, readers are advised to use it just for reading reference only and therefore final course of action is solely depending upon them entirely and author cannot be held liable in any manner whatsoever in relation to incompleteness of this title.
By: CS. Gunjan Gaur & CS. Deepak Bhardwaj with the Assistance of CA. Pranav Arora
Author Bio
Why do we need to follow provisions of preferential offer?