Non-Convertible Debentures (NCDs) have emerged as a cornerstone of corporate finance, playing a pivotal role in meeting both short-term and long-term capital needs. While public issues of NCDs exist, they are less common than private placements, which are governed by Section 42 of the Companies Act, 2013, read in conjunction with Section 71. This preference for private placements stems from their streamlined nature and efficiency.
One of the most appealing aspects of NCDs is their accessibility to a wide range of corporate entities, including private companies. A private company can issue listed NCDs on any recognized stock exchange simply by passing a board resolution and identifying the prospective allottees. To bypass the stringent regulations concerning deposits under Section 73 of the Companies Act, NCDs are almost always issued on a secured basis. This ensures a layer of protection for investors.
In addition to being secured, NCDs must also adhere to several other regulatory requirements to be a viable and trustworthy investment. They are typically required to have an investment-grade credit rating, ensuring a minimum level of creditworthiness. Furthermore, the appointment of a debenture trustee is mandatory to safeguard the interests of the debenture holders. Issuers must also comply with the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations), and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR).
NCDs are an integral part of an effective funding strategy. They are a powerful tool for harmonizing asset-liability mismatches and rationalizing the overall cost of funding. By strategically issuing NCDs, a company can optimize its capital structure and enhance its financial stability.
Evolution of NCD Regulations
The regulatory landscape for NCDs has evolved significantly over time. Before the amendments to the Companies Act, 2013, a company was required to pass a special resolution of its members to cover all NCD issues made during a financial year. This requirement has since been eliminated if the issuance is already covered under Sections 180(1)(a) and 180(1)(c) of the Act.
Further changes came in 2023 with the amendments to the NCS Regulations. Previously, companies issuing NCDs would use an Information Memorandum and a Shelf Prospectus for multiple tranches. The new regulations have replaced these with a General Information Document (GID) and a Key Information Document (KID). Now, every new NCD issue must be accompanied by a GID, and a KID is required for each new tranche of NCDs during the validity period of the GID.
Key Compliance Requirements
Compliance with various regulations is paramount for any company issuing NCDs. The LODR Regulations impose specific obligations on listed entities. For instance, the company must intimate the record date for interest payments or redemption at least seven working days in advance. A certificate confirming the payment must be submitted within one working day of the due date. Prior intimation of a board meeting must be given at least five working days in advance. Additionally, the company must submit a security cover certificate along with its financial results, providing details on the asset-backed security.
Under the new Debenture Trustee (DT) framework, there’s a requirement for the issuer to sign off on a list of assets charged for the debentures, enhancing transparency and monitoring.
For the Registrar of Companies (ROC), several forms must be filed to formalize the NCD issue. These include Form MGT 14 with a certified true copy of the Board Resolution, Form PAS-3 containing the list of allottees, and Form CHG-9 for the creation of charges in favor of the debenture trustee. Adhering to these filing requirements is crucial for ensuring the legality and validity of the NCD issuance.
In conclusion, while the process of issuing NCDs involves multiple regulatory layers, understanding and complying with these requirements is key to leveraging this powerful financing tool effectively.
Attached herewith excel sheet for quick calculation of interest payable on debentures subscribed and TDS for one FY only.
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Disclaimer :- Please Note its a brief note on NCDs and annexed excel sheet is only for understanding purpose.
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