Debentures-issue of debentures for Individuals

Work required to do before calling of Meeting:

• Identify the person to whom you will issue Debentures.
• Prepare the list of such persons to whom offer to subscribe debenture will give.
• Prepare Draft offer letter under PAS-4.
• Identify the debenture trustee (in case of the offer for subscription is for more than 500 persons).
• If there is a requirement to appoint Debenture Trustee, then obtain the consent of such debenture trustee.
• Ask the details from the Bank to open a separate Bank Account.
• Identify the assets of the Company on which charge will be creating (in case of issue of secured debenture).

STEP-1

Call Meeting of Board Director:

• Issue Notice of Board Meeting to all the directors of Company at least 7 days before the date of Board Meeting.
• Attach Agenda, Notes to Agenda and draft resolution of Board Meeting along with Notice.
• Approach the Debenture trustee and Obtain the consent of the Debenture Trustee.

STEP-II

Hold the Board Meeting:

• Check the quorum of Board Meeting.
• Decide whether Company wants to issue secured debenture or convertible debenture or any other mode of debentures.
• Get approve the list of such persons to whom offer for subscription will be given.
• Present Draft offer letter under PAS-4.
• Pass Board Resolution for approval of offer letter.
• Pass Board Resolution to increase the borrowing limit of the Company subject to the approval of the Shareholder in General Meeting.
• Passing of resolution for Issue the Notice of General Meeting along with the explanatory statement. (According to SS-2).
• Passing of resolution for Authorize a Company Secretary or director of Company to issue a notice of General Meeting.
• Passing of Resolution for taking note of the valuation report.
• Notice shall specify the place, date, day and the hour of the Meeting and shall contain a statement on the business to be transacted in the meeting. [Section-101(2)]
• Authorize a director of Company to issue a notice of General Meeting.
• Passing of resolution for Open Separate Bank Account for allotment of debentures.
• To pass a resolution for the appointment of debenture trustee. If required.

STEP-III

File Form with Registrar:

• File MGT-14 with Registrar within 30 days of passing of Resolution for:-
• Issue of debentures.
• Borrow Money.

Attachments:

• Certified True copy of Board Resolution.

STEP-IV

Hold Extra Ordinary General Meeting:

• Check the quorum of Meeting. (Section-103).
• Present Offer Letter in PAS-4 before the members of the Meeting.
• Pass Special Resolution for Private Placement of Debentures.
• Pass Special resolution for increasing the borrowing limit of the Company to issue Debentures.

STEP-V

Circulate Letter of Offer in form PAS-4:

• Offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made.
• Offer Letter sent either in writing or electronic mode.
• Issue offer letter within 30 days of General Meeting/recording the name of such person.
• Offer letter should mention the name of the Debenture Trustee if appointed.

STEP-VI

File Form with Registrar:

• File MGT-14 with Registrar within 30 days of passing of Special Resolution.

Attachments:

• Notice of General Meeting along with Explanatory Statement.
• Certified True copy of Special Resolution.
• Minutes of General Meeting

STEP- VII

Open Separate Bank Account:

• The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities.
• The Company shall keep the record of the Bank Account from where such payment for the subscription has been received.

STEP- VIII

File Form with Registrar:

• File GNL-2with Registrar within 30 days of circulation of the offer letter.

ATTACHMENTS:

• PAS-4 (Offer Letter).
• PAS-5 (Complete record of Private Placement).

STEP- IX

Call Board Meeting after receiving of allotment of money.

• Issue Notice of Board Meeting to all the directors of Company at least 7 days before the date of Board Meeting. [Section-173(3)]
• Attach Agenda, Notes to Agenda and draft resolution of Board Meeting along with Notice.

STEP- X

Hold the Board Meeting:

• Check the quorum of Board Meeting.
• Present List of Allottees before the Meeting.
• Pass Board Resolution for allotment of Debentures (within 60 days of receiving of money).
• Pass Resolution for issue of Debentures Certificate in the same Meeting.
• Authorize to two directors and an authorized person to sign Debenture certificate.
• Enter into Debenture Trust deed (SH-12), If required.
• To pass a resolution to create Debenture Redemption reserve.
• Pass a Board resolution to create a charge on the assets of the Company. (in case of secured debentures)

STEP- XI

File form with ROC:

File CHG-9 with Registrar of Company.

ATTACHMENTS:

• A certified true copy of the resolution authorizing the issue of the debenture series is mandatory in case of creation of charge.
• The instrument containing details of the charge created or modified is mandatory in all cases.
• Debenture Trust Deed, If prepared.
• Certified True copy of Special Resolution

STEP- XII

File form with ROC:

• File PAS-3 with Registrar of Company.

ATTACHMENTS:

• List of Allottees.
• Certified True copy of Board Resolution for allotment of Debenture.
• Valuation Report
• Certified True copy of Special Resolution

STEP- XIII

Entry into the register of Debenture:

• The entries in the registers maintained under section 88 form MGT-2 shall be made within 7(Seven) days after the Board of Directors approves the allotment of debentures

STEP-XIV

Issue Share Certificate:

• Issue Debenture Certificate within 6 (Month) months from the date of allotment of Debentures.

STEP-XV

Stamp Duty:

• Stamp Duty adjudication as per provisions & rates of Stamp Act of the State (only applicable on Marketable Debenture)

Required to appoint in case company giving the offer to subscribe debentures to more than 500 persons.

This resolution will be passed only in the condition when the current borrowing along with old borrowing exceeding 100% of paid-up share capital and free reserve.

 No need to file this MGT-14 in case of Private Limited Company.

The company have the time of 3 months from the date of closure of offer for executing debenture trust deed.

In case of issue of the Secured Debenture.

PRIVATE PLACEMENTS- SEC 42

• Meaning: offer of securities to a select group of persons by a company (other than by way of public offer) through the issue of a Pvt. placement offer cum application letter
• Process of Pvt. placements greatly tightened
• Given to max 200 persons in an F.Y.
• QIBs and employees to whom ESOP has given not included
• every offer of securities other than public, rights or bonus offer amounts to a Pvt.
• Placement and governed by the section.
• 200 for each kind of security
• Deemed public offer:
• to more than 200 persons in an F.Y. shall be deemed to be a public offer
• Every Pvt. placement not complying with the requirements of the section.

Applicability

Pvt. + public cos.

DEFINITION OF QIBS

‘Qualified institutional buyer’ means:

• a mutual fund, venture capital fund[, Alternative Investment Fund]9 and foreign venture capital investor registered with the Board;
• a foreign portfolio investor other than Category III foreign portfolio investor], registered with the Board;
• a public financial institution as defined in section 4A of the Companies Act, 1956;
• a scheduled commercial bank;
• a multilateral and bilateral development financial institution;
• a state industrial development corporation;
• an insurance company registered with the Insurance Regulatory and Development Authority;
• a provident fund with minimum corpus of twenty-five crore rupees;
• a pension fund with minimum corpus of twenty-five crore rupees;
• National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005, of the Government of India published in the Gazette of India;
• insurance funds set up and managed by army, navy or air force of the Union of India;
• insurance funds set up and managed by the Department of Posts, India;
• systemically important non-banking financial companies .

SECURITIES COVERED AND RELEVANT PROVISIONS (1/2)

Kinds of security covered:

• Shares
• Debentures

• Shares-
• Equity shares- Sec 42, 62
• Preference shares- Sec 42, 55

 Debentures-

• CCDs – Sec 42, 71, 62
• NCDs – Sec 42, 71

 If unsecured and unlisted then treated as deposits

• OCDs – Sec 42, 62, 71

 If unsecured, then treated as deposits

• PCDs- Sec 42, 62, 71

If unsecured, then treated as deposits

SECURITIES COVERED AND RELEVANT PROVISIONS

Securities not covered:

• No negative list provided
• However, equity shares and convertible securities are governed both by
• provisions of a private placement (sec 42); and
• preferential allotment (sec 62)
• Every preferential issue is private placement but the reverse is not

COMPANIES (AMENDMENT) ACT, 2017

QUICK SNAPSHOT OF THE CHANGES

• Substitution of the entire section
• To specifically provide for no renunciation rights in the PPOAL (Private Placement Offer cum Application Letter )
• Details of particulars of offer given in PAS-4 shall also be provided in the explanatory statement to shareholders’ resolution
• Restriction on the utilization of application money unless allotment is made and returns of
• allotment is filed
• The debate over “unless” w.r.t administrative pt. of view
• The liberal view is taken to utilize money before filing in case the co. files PAS-3 within 15 days
• on time
• To enable companies to make more than one issue of securities at any time to the identified
• persons under this section.
• Filing of offer letter and record of private placement in e-Form GNL-2 dispensed with.

QUICK SNAPSHOT OF THE CHANGES (2/2)

• The time limit for filing return of allotment in PAS-3 reduced to 15 days from 30 days from the date
• subscription amount of Rs. 20,000 per person dispensed with
• No issuance of PPOAL unless e-Form MGT-14 is filed for BR or SR
• No exemption to private companies from the aforesaid filing
• MCA exemption notification dated 5th June 2015 stands nullified
• Failure to file the above form to make promoters and directors liable to a penalty for each default of 1000 rupees for each day subject to a max. 25 lakhs.
• Penalty on promoters and directors for contravention of section 42 to be amended as the amount raised through such offer or 2 crore, whichever is lower. (Earlier it was amount involved in the offer or 2 crores, higher)

PPOAL MADE EXHAUSTIVE (1/2)

Earlier requirement:

• of passing BR and SR
• Kinds of securities i.e. shares/ debt and class of securities
• Name and address of valuer performing valuation
• Amount intended to be raised
• Terms of raising securities
• Timeline of the validity of an offer

New requirement- To provide the following additional details:

• Any default in annual filing under the Companies Act, 2013
• Total no. of shares or securities to be issued
• The basis on which the price has been arrived at along with the report of the registered valuer
• Relevant date with reference to which the price has arrived
• RD= date at least 30 days prior to the date of GM
• Class of persons to whom the allotment is proposed to be made
• The intention of promoters, directors or KMP to subscribe to offer
• NA in case of NCDs since there only 1 blanket SR is sufficient
• Proposed timeline to complete allotment

PPOAL MADE EXHAUSTIVE(2/2)

• Names of proposed allottees and the percentage of post Pvt. placement capital that may be held by them
• NA in case of NCDs
• Change in control, if any, consequent to Pvt. placement
• of persons to whom allotment of pref. basis has already been made during the year, in terms of securities as well as price
• Justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer
• Form PAS-4 to show the pre and post issue holding of various groups of entities like
• promoters/ non-promoters and their sub-categories
• Mode of payment for subscription
• Personal details of applicant to be filled in the Form

WIDER EXPLANATORY STATEMENT

Earlier requirement

• Basis or justification for the price (incl. premium, if any) at which offer is made

New requirement- Following additional details:

• Particulars of the offer including date of BR
• Kinds of securities offered and the price at which offered
• Basis or justification for the price (incl. premium, if any) at which offer is made
• Name and address of valuer performing valuation
• Amount intended to be raised
• Material terms of raising such securities, proposed time schedule, the object of an offer, contribution being made by promoters/ directors, principal terms of assets charged as securities.

BRIEF PROCEDURE FOR MAKING PRIVATE PLACEMENT (1/4)

• The procedure would include compliance at the following 4 stages:
• Prior to issuance of PPOAL
• Issuance of PPOAL
• Post issuance of PPOAL
• Allotment of Securities
• SR is required for every private placement
• The only exception is in case of NCDs where issuance may be done if within the limits of sec. 180 ( 1) ( c)
• Exception in case of NBFCs is for the limit of 200
•  However, similar restrictions exist by way of RBI guidelines on private placement

BRIEF PROCEDURE OF PRIVATE PLACEMENT (4/4)

Allotment of securities

• To be made by the board or delegated authority within 60 days from the date of receipt of application money.
• File e-Form PAS-3 within 15 days of allotment.
• Utilize money only after filing e-Form PAS-3 Liberal view to utilize money even before filing PAS-3 in case the co. files PAS-3 within 15 days i.e. on time.
• Issue share certificates/ debt certificates within 2 months from the date of allotment
• Enter in the register of members/ debt holders within 7 days of approval of the allotment of securities by the board or delegated authority.

COMPLIANCE W.R.T. NCDS

The process remains the same except the following:

• If within limits of 180(1)(c)
• must have obtained blanket shareholders’ approval u/s 180(1)(c) then only BR shall suffice for Pvt. placement
• If exceeding limits of 180(1)(c)

1 SR in 1 year shall suffice

1 year to year and not 1 F.Y. to F.Y.

EXEMPTIONS

Part exemptions provided the w.r.t calculation of limits of 200

• NBFCs registered with RBI
• HFCs registered with NHB
• If they are complying with regulations made by RBI or NHB in respect of offer or invitation to be issued on Pvt. Placement basis.

 At present the regulations prescribed for NCDs are as under:-

• Guidelines on Private Placement of NCDs (maturity more than 1 year) by NBFCs.
• Housing Finance Companies issuance of Non-Convertible Debentures on private

Placement basis (NHB) Directions, 2014.

TWOFOLD PENAL PROVISIONS

• Failure to file PAS-3 on time

Promoters+ Directors+ Co.= Rs. 1000 each day – 25 lacs

• Failure to comply with Sec 42

Promoters + Directors + Co.

Amount raised through Pvt. placement or 2 crores, whichever is lower

• Earlier higher of the two to refund the money with interest to the subscribers within 30 days of the order of penalty.

Compliance with the listed company:

1. The issuer makes an application for listing of its debt securities to the recognised stock exchange.

2. Issuer Company must have a net worth of Rs. 500 crores as per audited balance sheet of the preceding financial year and having the consistent track record of distributable profit of the last three years.

3. Obtain In-principle approval for listing of debt securities from SE where it is to be listed.

4. Obtain a credit rating from at least one credit rating agency.

5. Make an agreement with Depository Registrar with the board for dematerialisation.

6. Appoint one lead Merchant Banker.

7. The issue may be underwritten by an underwriter registered with the Board.

8. Prepare draft Offer documents which should contain all material disclosure and should submit to the stock exchange.

9. The draft offer documents shall be made public by posting the same on the website of the stock exchange, merchant banker and issuer. Receive comments from the public within 7 days from the date of filing documents with SE.

10. Obtain due diligence certificate by a lead merchant banker in schedule II.

11. The final documents to be submitted to SE and host on the website of the issuer company, stock exchange, merchant banker in PDF / HTML form. And also make an advertisement in a national daily with wide circulation, before the issue opening date.

• Issue notices of extraordinary general meeting along with the explanatory statement.
• Hold the extraordinary general meeting and pass a special resolution to issue debentures and increase borrowing powers of the company and to authorize the Board to create the charge on the assets of the company.
• Special Resolution to be passed through Postal Ballot or E-voting by Listed Company as the case may be.
• File the Scrutinizer Report to SE and host the same at the website of the Company.
• File Form No. PAS – 4 and PAS – 5 in Form No. GNL – 2 with the Registrar of Companies.
• File Offer Letter, the copy of Board resolutions, Special Resolution, Debenture Subscription Agreement, Debenture Trustee Agreement etc in Form No. MGT – 14 with the Registrar of Companies. (file within 30 days of passing Resolution)
• File Form No. PAS – 3 (Return of allotment) with the Registrar of Companies after making allotment of debentures within 15 days of allotment.
• File Form No CHG – 9 within 30 days of the creation of charge on assets of the Company and SH-12 for Debenture Trust Deed within 3 months of the closure of the issue.
• Get Debentures Listed and Issue in the Stock Exchange.