Issuance of Optionally Convertible Debentures – Overview

Optionally Convertible Debentures (OCDs): A Comprehensive Guide to Issuance, Compliance, and Impact

Introduction

The Companies Act of 2013 introduced Optionally Convertible Debentures (OCDs) as a financial instrument for companies to raise capital. This article provides a detailed understanding of OCDs, including their features, issuance process, regulatory compliance, and their impact on companies and investors. By complying with the provisions outlined in the Companies Act and related rules, companies can benefit from the flexibility and advantages offered by OCDs.

Understanding the Regulatory Framework:

i. Section 71: This section deals with the provisions related to the issuance of debentures by companies. It covers the conditions, terms, and manner of issuance, including the creation of a charge, debenture trust deed, and the types of debentures that can be issued.

ii. Section 72: This section pertains to the registration of charges, including charges created on debentures. It requires companies to register charges with the Registrar of Companies within specified time limits to ensure transparency and protect the interests of debenture holders.

iii. Section 73: This section regulates the acceptance of deposits by companies. It states that debentures issued by companies shall not be considered as deposits, provided they comply with the rules and conditions prescribed under the Act.

iv. Section 117: This section deals with the filing of resolutions and agreements with the Registrar of Companies. Any resolution or agreement related to the issue of debentures, such as special resolutions passed by shareholders, must be filed with the Registrar within specified time limits.

In addition to these sections, companies issuing debentures must also comply with the relevant rules prescribed under the Companies Act 2013, including:

i. Companies (Share Capital and Debentures) Rules, 2014: These rules provide detailed guidelines regarding the issuance of debentures, including the manner of creating a charge, debenture trust deed, valuation of assets, terms and conditions of debenture issues, and the appointment and duties of debenture trustees.

ii. Companies (Registration of Charges) Rules, 2014: These rules specify the procedures and timelines for registering charges created by companies, including charges on debentures. It outlines the forms, documents, and fees required for registration.

It is important for companies issuing debentures to thoroughly understand and comply with these sections and rules to ensure legal and regulatory compliance throughout the debenture issuance process.

Overview of Optionally Convertible Debentures

Optionally Convertible Debentures provide companies with the flexibility to convert them into equity shares at a later stage, based on predetermined conditions. Unlike compulsorily convertible debentures, the conversion of OCDs is not mandatory and can be exercised at the discretion of the debenture holder or as mutually agreed between the parties.

Features and Benefits of Optionally Convertible Debentures

OCDs offer advantages to both companies and investors. Companies can raise funds without significant dilution of ownership while benefiting from interest payments during the debenture tenure. The option to convert OCDs into equity shares allows companies to seize favorable market conditions or strategic opportunities.

Investors earn fixed interest income until conversion and have the flexibility to convert debentures into equity shares or retain them until maturity. Conversion at a later stage enables investors to participate in potential capital appreciation.

Issuance Process of Optionally Convertible Debentures

To issue OCDs, companies must comply with the regulations prescribed under the Companies Act 2013 and related rules. The following steps outline the typical process:

1. Board Approval: The board of directors must pass a resolution to authorize the issuance of OCDs, including determining the terms, conditions, and the maximum number of debentures to be issued.

2. Shareholder Approval: Companies are required to obtain approval from shareholders through a special resolution passed at a general meeting. The resolution must specify the details of the proposed OCD issuance.

3. Valuation and Pricing: Companies need to conduct a valuation of their shares to determine the conversion price of the debentures. The conversion price should be determined by a registered valuer.

4. Debenture Trustee Appointment: A debenture trustee, who acts as a representative of debenture holders, must be appointed to safeguard their interests.

5. Offer Letter and Application: An offer letter containing the terms and conditions of the OCDs must be prepared. Interested investors can apply for the debentures by submitting a duly filled application form along with the necessary payment.

6. Allotment and Listing: Companies must allot the OCDs within 60 days of receipt of the application money. If the debentures are proposed to be listed on a stock exchange, the listing formalities should be completed as per the SEBI guidelines.

Regulatory Compliance and Disclosures

Companies must adhere to various regulatory requirements, including compliance with the Companies Act 2013, SEBI regulations, and listing agreement guidelines. Proper disclosures in the offer letter, prospectus, and other documents provided to investors are crucial. Regular disclosure of fund utilization ensures transparency.

Impact and Conclusion

The introduction of Optionally Convertible Debentures (OCDs) under the Companies Act 2013 has had a significant impact on the financing landscape in India. Companies now have a versatile tool for raising capital while retaining ownership control. OCDs offer flexibility and benefits to both companies and investors, contributing to a more dynamic capital market environment.

For companies, OCDs provide an avenue to raise funds without diluting ownership significantly. They can generate interest income during the debenture tenure and convert the debentures into equity shares when advantageous market conditions or strategic opportunities arise. This allows companies to balance their need for capital with the preservation of ownership control.

Investors, on the other hand, benefit from the fixed interest income earned from OCDs until conversion. They have the option to convert debentures into equity shares or retain them until maturity. The choice to convert at a later stage enables investors to participate in potential capital appreciation of the company’s shares, offering them potential long-term gains.

In terms of regulatory compliance, companies issuing OCDs must adhere to the provisions of the Companies Act 2013, SEBI regulations, and listing agreement guidelines. These regulations ensure transparency, protect the interests of investors, and maintain the integrity of the financial market. Compliance with proper disclosures and periodic reporting of fund utilization enhance transparency and instill confidence in investors.

In conclusion, OCDs have emerged as a valuable financial instrument for companies and investors alike. They provide companies with a flexible financing option while offering investors an alternative investment avenue. By complying with the regulatory framework and following the prescribed issuance process, companies can harness the benefits of OCDs. The availability of OCDs has contributed to a more dynamic capital market environment, fostering growth and flexibility for Indian companies.

It is important for companies and investors to stay updated with any amendments or changes in the regulatory framework related to OCDs to ensure continued compliance and maximize the potential benefits offered by this financial instrument.

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Disclaimer: The entire contents of this article have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, the author assumes no responsibility therefore. Users of this information agrees that the information is not a professional advice and is subject to change without notice. The author assumes no responsibility for the consequences of use of this information. IN NO EVENT THE AUTHOR SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM OR ARISING OUT OF OR IN CONNECTION WITH THE USE OF THIS INFORMATION.