Kunal Mehra
Broadly any company issuing Compulsorily Convertible Debentures (CCD) will be required to comply following laws in India, which are as under:
1. Companies Act 2013 ,
2. Foreign Exchange Management Act ( FEMA)
3. Income Tax Act, 1961
The overview of some of the provision of above laws to be taken into consideration before choosing CCDs as instrument for raising funds by a private limited company:
Page Contents
1. Companies Act 2013:
What is Debenture:
As per Sec 2(30) of the Companies Act 2013 “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;
Nature of Debenture:
As per Sec 71(1) of the Companies Act 2013, company may issue unsecured debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption.
Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting.
If the debentures are not convertible into shares, either wholly or partly then such debentures may be issued by a company subject to such terms and conditions as prescribed in Companies (Share Capital and Debentures) Rules, 2014
Issuance of Debentures:
As per Sec 73 of the Companies Act, 2013 read with Companies Acceptance Deposit Rules, 2014, no private company is allowed to accept deposits from public and even in the case of public companies there are certain conditions and procedures which company has to comply with in order to be eligible for acceptance of deposit.
Section 2(31) of the Act defines the term ‘deposit’ and states that ““deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. “Therefore, the definition of the term ‘deposit’ under the Act is an inclusive definition and covers all receipts except such categories of amounts as may be prescribed in consultation with the Reserve Bank of India
Accordingly, issuance of Debentures will be categories as acceptance of Deposit under the provision of Companies Act, 2013
However, there are certain categories of transactions which does not fall under the definition of Deposit and therefore will not be required to comply with provisions of above law:
♠ as per clause (ii) of Rule 2(1)(c) of the Deposit Rules, any amount received from foreign governments, foreign or international banks, multilateral financial institutions (including but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or person resident outside India subject to the provisions of the Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made thereunder;
♠ as per clause (vi) of Rule 2(1)(c) of the Deposit Rules, any amount received by one company from another
♠ as per clause ix) of Rule 2(1)(c) of the Deposit Rules any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking paripassu 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 five years:
Provided that if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer;
♠ as per clause (viii) of Rule 2(1)(c) of the Deposit Rules , any amount received from a person who, at the time of the receipt of the amount, was a director of the company:
Provided that the director from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired from borrowing or accepting loan or deposit from other
Accordingly company is allowed to issue unsecured CCD provided it is compulsorily convertible into shares within five years.
However, there is another view for which company can take legal opinion, that CCD can be issued for period more than 5 years subject to FEMA regulation, if the same has been issued to any other company registered in or Outside India, person resident outside India or director as per clause (ii), (vi) and (viii) of Rule2 (1) © of the deposit rules as explained above.
2. Foreign Exchange Management Act ( FEMA)
FDI Regulation:
Under the FDI regime, investment can only be made into equity, fully and fully and compulsorily convertible debentures (“CCDs”). Instruments which are not fully and convertible instruments are considered to be external commercial borrowing (“ECB”) and therefore, are governed by ECB regime. Also, any such instrument having a ‘put option’ in favour of a non-resident shall not be FDI compliant unless in consonance with the conditions laid down by RBI, wherein the valuation norms for such optionality clauses are prescribed which prohibit any assured returns to the non-resident.
Investment though subscription of CCDs will be subjected to the sectorial cap applicable ,if any, as it is essentially an equity route in as much as there is definite commitment to convert into common equity shares
Pricing guidelines
Fresh issue of shares:
Price of fresh shares issued to persons resident outside India under the FDI Scheme, shall be on the basis of
o SEBI guidelines in case of listed companies ,
o Not less than fair value of shares determined by a SEBI registered Merchant Banker or a Chartered Accountant as per as per any internationally accepted pricing methodology on arm’s length basis.
The pricing of shares / convertible debentures / preference shares should be decided / determined upfront at the time of issue of the instruments. The price for the convertible instruments can also be a determined based on the conversion formula which has to be determined / fixed upfront, however the price at the time of conversion should not be less than the fair value worked out, at the time of issuance of these instruments, in 12 accordance with the extant FEMA regulations
3. Income Tax Act, 1961
Interest Payment:
Any interest paid on CCD issued to associated enterprise will be subject to transfer regulation of India and should not be more than acceptable benchmark of interest rate.
Pricing guidelines:
Any issuance of shares by private limited company shall not be at price less than the fair market value calculated as per Rule 11UA of the Income Tax rules.
Taxability of Interest on CCD:
We have analysed two countries for the purpose of taxability of Interest on CCD, which are as under:
♠ Australia: As per DTAA with Australia, any interest received by person resident in Australia on CCD issued by person residing in India ,say company, will be taxable @ 15 percent,
♠ Mauritius: As per existing DTAA with Mauritius, any interest received by person resident in Mauritius on CCD issued by person residing in India, say company, will be taxable @7.50 percent.
♠ Singapore: As per existing DTAA with Singapore, any interest received by person resident in Mauritius on CCD issued by person residing in India, say company, will be taxable @ 15 percent.
(Author is Partner at Gurgaon based audit, tax and advisory firm namely AARK )
Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.
(Republished with Amendments by Team Taxguru)
Is interest on CCD subject to transfer pricing regulations in India if the CCDs are INR denominated and issued by Indian subsidiary to foreign parent company?
After the 2016 amendment, it is compulsorily convertible debentures within a period of 10 years and not 5 years.
We are trying to buy a loss making company where in there are CCDs in resident company invested by a Non Resident company from Australia.
Since the Loss is more than CCD, the Non Resident company is ready to forgo the CCD payable to there NR Company.
1. Is it falls as Income for Resident Company where the Resident company need to declare the Income and pay income tax or set-off losses.
2. Alternatively can we convert the CCDs into Shares and then erose the Capital against Losses c/f in the Books.
3. If we merge the company with a profit making company, can we take the benefit of tax losses in the merging company after w/o of CCDs
What is the consequence of Repayment of CCD without converting in to Equity?
we have fixed book value of fy 2018, as the conversion price of debentures for debentures issued on 2017. Now if the book value of company decreases, can the company still issue at book value, or will then have to issue an issue price at 2017.
Can CCDs be pledged to secure loan granted by banks and whether CCDs convertible after a period of 18 years from the date of their allotment fall within the purview of Companies (Acceptance of Deposits) Rules, 2014.
For CCD, is there is a interest rate cap on the coupon paid to a foreign investor?