Introduction
Venture debt is a form of debt financing specifically designed for early-stage, high-growth startups, that have already raised venture equity capital. Unlike traditional bank loans, venture debt is provided by specialized lenders who are familiar with the unique risks and opportunities associated with startup financing. Venture debt is typically used to supplement equity financing, providing startups with additional capital to fuel growth without further diluting the ownership of founders and existing investors.
Venture Debt raising process under the Companies Act, 2013
Generally, Venture Debt Fund (‘Fund’) grants the funding by way of subscription of Secured, Non-Convertible Debentures (‘NCD’) issued by the Company. Once the term sheet and definitive agreement has been signed between the Company and the Fund, the Company needs to follow the process as required under the Companies Act, 2013 for issuance of NCD to the Fund.
Regulatory framework for issuance of NCD for Private Limited Companies:
- Section 23, Section 42, Section 71, Section 179(3) and Section 180 of the Companies Act, 2013;
- Section 62 of the Companies Act, 2013; (If convertible debentures are to be issued)
- Companies (Share Capital and Debentures) Rules, 2014;
- Companies (Prospectus and Allotment of Securities) Rules, 2014.
Process of issuance of Non-Convertible Debentures (NCD)
1. Finalization of key terms and conditions
The first step is to finalize certain key terms and conditions like the amount of debt required to be raised, tenure, moratorium period, rate of interest, security against which debt will be raised, the nature of instrument to be issued to the Fund, etc.
2. Signing of term sheet
Once, the key terms and conditions are finalized with the Fund, the Fund will issue term sheet to the Company containing all the agreed terms and conditions for grant of funding. Of course, the term sheet is non-binding and subject to successful completion of due diligence before execution of definitive agreement.
3. Approval of Board of Directors
On receipt of term sheet and successful completion of due diligence, the Company needs to convene the board meeting for approval of the following items:
- Approval of Issue of NCD;
- Approval of Appointment of Debenture Trustee and execution of various documents like Debenture Trust Deed, Debenture Trustee Agreement, Deed of Hypothecation etc.;
- Approval of notice convening General Meeting of the Company.
4. Approval of Shareholders
Once the Company takes board approval, the next step is to convene the General Meeting of the Members of the Company and take approval of members by way of Special Resolution of the Company for the following items:
- Approval of Issue of NCD;
- Approval of Appointment of Debenture Trustee and execution of various documents like Debenture Trust Deed, Debenture Trustee Agreement, Deed of Hypothecation etc.
The Special Resolution shall contain the details of NCD along with key terms and conditions of issue of NCD and the explanatory statement shall contain the disclosures as required under Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
5. Appointment of Debenture Trustee
If the Company propose to issue secured NCD, it has to appoint Debenture Trustee and execute Debenture Appointment Agreement and Debenture Trust Deed to protect the interest of debenture holders before the issue of prospectus or letter of offer. The Company should obtain written consent of debenture trustee prior to the board meeting.
6. Execution of Definitive Agreement
The Company shall execute the definitive agreement like Securities Subscription Agreement (‘SSA’) with the Fund post receipt of approval from Board and Shareholders. The said SSA should be drafted / vetted minutely which covers important terms and conditions of lending, timelines, conditions precedent and subsequent, etc. Apart from SSA, the Company also needs to execute the Debenture Appointment Agreement, Debenture Trust Deed as well as Deed of Hypothecation (for hypothecation of movable assets of the Company) with the Debenture Trustee.
7. Filing of e-form MGT-14 with the Registrar
The Company shall file e-form MGT-14 for the special resolution passed by the members of the Company for issuance of NCD within 30 days from the passing of resolution. The Company shall attach the copy of the special resolution along with explanatory statement, notice of EGM and consent of shareholders for shorter notice, if applicable.
8. Recording names of debenture holders
The Company shall record the name and other details of proposed debenture holders in form PAS-5 before issuance of letter of offer. This PAS-5 shall contain the name, address, phone number and email id of proposed debenture holders.
9. Issue of Private Placement Offer cum Application Letter
After filing e-form MGT-14 and recording of names of proposed debenture holders in form PAS-5, the Company shall issue Private Placement Offer cum Application Letter (‘PPOAL’) in form PAS-4 to all the proposed debenture holders. PPOAL shall be serially numbered and addressed specifically to proposed debenture holder.
10. Receipt of debenture subscription money
The Company shall receive the debenture subscription money from debenture holders into separate bank account of the Company opened specially for the private placement of securities.
11. Allotment of debentures
The Company shall allot the debenture against the receipt of money within 60 days from the date of receipt of money into separate bank account.
12. Filing of return of allotment in e-form PAS-3
The Company shall file e-form PAS-3 i.e Return of Allotment within 15 days from the date of allotment of debenture to the debenture holders. The Company shall attach list of allottes, board resolution for issue and allotment of debentures etc. in e-form PAS-3.
13. Filing of e-form CHG-9 for registration of charge with the Registrar
The Company shall file e-form CHG-9 for creation of charge on the assets of the Company in favor of Debenture Trustee for securing due repayment of debenture principle as well as interest thereon and to protect the interest of debenture holders.
14. Payment of Stamp duty and Issue of Debenture Certificate
The Company shall pay the requisite stamp duty on debenture certificate (Article 27 of Indian Stamp Act provides 0.005% of the total amount) and issue debenture certificate within 60 days from the date of allotment of debentures to all the debenture holders.
15. Updating of Register of Debentures
The Company shall enter the names of debenture holders along with other details in its register of debentures.
Conclusion
As India’s startup ecosystem continues to thrive, venture debt has emerged as a popular funding option for some of the profitable and high growth companies because of several reasons like excessive dilution concerns, high valuation expectations, taxation benefits on interest payment etc. Venture debt allows startups to access capital without diluting equity, making it an attractive choice for founders looking to scale their businesses and acquire target companies.
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