RBI attempts to liberalize the strictly regulated Private Placement of NCDs by NBFCs: issues Revised Guidelines.
With an intent to regulate the privately placed issues of debentures by Non Banking Financial Companies (NBFCs) and to ensure minimum compliances, RBI vide Notification No. RBI/2012-13/560 DNBD (PD) CC No. 330/03.10.001/2012-13 dated 27th June, 2013 (the previous Notification) had inter-alia issued Guidelines on Private Placement of securities by NBFCs (the Initial Guidelines). The Guidelines came into existence with immediate effect from the date of the Notification. Further, RBI vide Notification No. RBI/2013-14/115 DNBS(PD) CC No.349/03.10.001/2013-14 dated 2nd July, 2013 (the Clarification) issued Clarifications subsequent to receipt of number of queries from the industry in this matter.
Formerly, there were as such no guidelines for issue of debentures on private placements by public or private NBFCs. Moreover, the limit of 49 subscribers for a private offer as envisaged by section 67 of the Companies Act, 1956 was not applicable to the NBFCs.
The purpose behind issuing the Initial Guidelines was due to the practice followed by NBFCs to raise funds through issue of NCDs without any restriction. This reflected their inadequate resource planning and resulted in higher transaction cost. In view of the same, as per the Clarifications, RBI had directed NBFCs to formulate a Board approved policy for resource planning, covering the planning perspective and periodicity of private placement, before close of business on September 30, 2013.
The Present Circular
In supersession of the Initial Guidelines and the Clarification, RBI has vide Notification No. RBI/2014-15/475 DNBR (PD) CC No.021/03.10.001/2014-15 dated February 20, 2015 ( present Notification) issued guidelines ( the Revised Guidelines) after reviewing the same in the light of the provisions of Companies Act 2013 ( Act, 2013) and the Rules issued thereunder. Further, provisions of Act, 2013 and Rules are applicable only to the extent not contradictory.
The requirement of the Board to approve a policy for resource planning, inter-alia covering the planning horizon and periodicity of private placement has been retained under the Revised Guidelines too.
RBI has stipulated the guidelines majorly for issuance of private placement of NCDs of 2 categories:
a) With a maximum subscription of less than Rs. 1 crore (Category A)
b) With a minimum subscription of Rs. 1 crore and above (Category B)
Quick Comparison of Revised and Initial Guidelines and Corresponding provisions under Act, 2013:
|Parameters||Revised Guidelines||Initial Guidelines||Act, 2013|
|Minimum subscription per Investor||Rs. 20,000||Initial Rs. 25 lakh and in multiples of Rs.10 lakh thereafter||Rs. 20,000 of Face Value|
|Limit of subscribers||Category A: 200
Category B: No limit
|Security creation||Category A: Mandatory
Category B: Optional
|Mandatory, except in case of subordinated debt||Mandatory|
|Meaning of Private Placement||No such explanation||means non-public offering of NCDs by NBFCs to such number of select subscribers and such subscription amounts, as may be specified by the Reserve Bank from time to time||means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in Section 42.|
|Amount to be secured||Amount of Debentures||Amount of Debentures||Amount of Debentures and interest|
|Nature of Security to be created||By the mortgage of any immovable property of the company; or by any other asset||By the mortgage of any immovable property of the company; or by any other asset||b) by way of a charge or mortgage shall be created in favour of the debenture trustee on-
(i) any specific movable property of the company (not being in the nature of pledge); or
(ii) any specific immovable property wherever situate, or any interest therein.
|Restriction on deployment of funds||Own balance sheet and not to facilitate resource requests of group entities/ parent company / associates.
(Not applicable to Core Investment Companies)
|Own balance sheet and not to facilitate resource requests of group entities/ parent company / associates.
(Not applicable to Core Investment Companies)
|No such restriction specified|
|Loan against security of debentures issued.||NBFC shall not extend loans against the security of its own debentures (issued either by way of private placement or public issue)||An NBFC shall not extend loans against the security of its own debentures (issued either by way of private placement or public issue).||No such restriction|
|Applicability to Tax exempt Bonds||Exempted||No such Exemption||No such Exemption|
Quick Comparison of Category A & B:
NBFC’s dependence on Debentures:
Non Banking Financial Companies (NBFCs) raise money through issuance of capital/debt securities (including debentures) by way of public issue or private placement. Lately, a substantial increase in borrowings of NBFCs has been witnessed by way of issue of debentures major being on private placement basis. As per RBI’s report on ‘Trend and Progress of Banking in India’, 2012-13, NBFCs-D has borrowed Rupees 318 billion by issue of debentures during the year 2012-13 as against 238 billion in the year 2011-12 and Rupees 3726 billion has been raised by NBFC-ND-SI during the year 2012-13 as opposed to 2950 billion during 2011-12. Such debentures consisted of both- secured and unsecured issues.
Provisions of Law Applicable to Private Placement of Debentures by NBFCs Prior to and Post Issue of the Revised Guidelines:
Companies Act, 2013 (“Companies Act”) and Rules framed thereunder
Section 42 dealing with Offer or invitation for subscription of securities on private placement:
Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 dealing with Private Placement
Section 42 of the Act read along with Rule 14 provides for private placement of securities through issue of offer letter, number of persons to whom securities can be issued, manner of collection of money payable towards subscription of securities, minimum investment size limit for subscription, time period for allotment of security, maintenance and filing of records and offer letter with the Registrar and with SEBI, in case of listed company, and filing of return of allotment with Registrar.
Further Rule 14(5) exempts NBFCs from complying with limit of number of persons i.e. 200 and minimum investment size limit i.e. Rs 20,000 if they are complying with regulations made by RBI in respect of securities issued on private placement basis
However, the Revised Guidelines have categorized the issue of private placement of NCDs in two categories
Under Revised Guidelines, minimum investment has aligned with Act, 2013 to be Rs. 20,000.
Section 71 and Rule 18 of Companies (Share Capital and Debentures) Rules, 2014 dealing with Debentures
Section 71 of Act, 2013 read with Rule 18 specifies provision for tenure of secured debentures, nature of security to be created, amount of Debenture redemption reserve to be maintained, appointment, eligibility and duties of debenture trustee, meeting of debenture holders etc.
Section 71(4) requires every company issuing debentures to create a debenture redemption reserve (“DRR”) account out of the profits of the company available for payment of dividend and the amount credited to such account shall be utilized only for the purpose of redemption of such debentures. However, as per Rule 18(7) (b) (ii) of Companies (Share Capital and Debentures) Rules, 2014, no DRR is required to be maintained in case of privately placed debentures by NBFCs.
Section 77 of the Act, 2013 requiring registration of charges
Section 77 of the Act,2013 states that every company creating a charge on its property or assets or any of its undertakings, whether tangible or otherwise, have to register the particulars of the charge with the Registrar within thirty days of its creation
In case of Category A it is mandatory for non convertible debenture to be fully secured in favour of subscribers and in case of Category B it is optional for issuer to create security in favour of subscribers.
In terms of NBFCs (Acceptance of Public Deposit) Directions, 1998, debentures should be secured by mortgage of immovable property or any other asset of the issuer company. Security created by way of mortgage of immovable property would require registration under this section.
SEBI (Issue and Listing of Debt Securities) Regulations, 2008
These regulations are applicable to-
(a) public issue of debt securities; and
(b) listing of debt securities issued through public issue or on private placement basis on a recognized stock exchange.
Therefore, these regulations shall not be applicable to privately placed debentures unless the issuer is to get the listing of such debentures.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
These regulations will regulate the issue of convertible debentures on preferential basis by listed NBFCs.
The Revised Guidelines
From February 20, 2015 onwards, any issue of non convertible debentures-by NBFCs – whether public or private, listed or unlisted, on a privately placed basis, shall be governed by the Revised Guidelines and provisions of the same shall have an overriding effect on provisions of Act, 2013 and Rules issued thereunder, if found contradictory with each other.
Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010
These Directions will be applicable to Non-Convertible Debenture (NCD) issued by a corporate (including NBFCs) with original or initial maturity up to one year and issued by way of private placement.
Complexity in determining the Face Value of NCD for issuance by Category A NCD:
The Revised Guidelines specifies to have a minimum subscription of Rs. 20,000 which is in line with the requirements of Act, 2013. However, in case the proposed NCD issuance is to be listed, the same has be complaint of SEBI ( Issue and Listing of Debt Securities) Regulations, 2014. These regulations, under Schedule I specify that the face value of the instruments should be Rs. 10,00,000.
Formerly, SEBI vide circular no. SEBI/MRD/SE/AT/46/2003 dated December 22, 2003 had issued a clarification to the SEBI circular No. SEBI/MRD/SE/AT/36/2003/30/09 dated September 30, 2003 on Secondary Market for Corporate Debt Securities. The Clarification, inter alia provided under para 4.9 that the privately placed debt securities need not necessarily be issued in denomination of Rs. 10 lakhs. However, subsequent to issuance of 2008 regulations, whether the said clarification is still effective? There is a need for SEBI to clarify the same.
Otherwise, in case of Category A issuances made by NBFCs, where the same are required to be listed on stock exchanges, the face value will have to be mandatorily be Rs. 10,00,000. In the absence of such a provision, the NBFC may consider to have a face value of Rs. 20,000 itself.
Amendment to the NBFC Public Deposit Directions:
RBI amended the NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998 vide Notification No. DNBS.(PD) 257/PCGM(NSV)-2013 dated June 27, 2013 (previous PD Notification) which shall continue to be in force. Subsequently, RBI vide Notification No. DNBR.(PD) 006 /GM(MSG)-2015 dated February 20, 2015 (recent PD Notification) has inserted a new clause (fa) under para 2(xii)(f) of Acceptance of Public Deposits (Reserve Bank) Directions, 1998.
Mentioned hereunder are the changes notified by the RBI in the definition of ‘Public Deposit’ both under previous PD notification and recent PD notification:
1. Availability of Exemption to Debentures:
1.1 Position prior to amendment– Exemption was available to debentures issued with an option to convert them into shares of the company.
1.2 Position after previous PD notification– Debentures compulsorily convertible into equity are excluded from the meaning of public deposit
2. Availability of Exemption to hybrid debt or subordinated debt:
2.1 Position prior to amendment – Exemption was available to hybrid debt or subordinated debt with minimum maturity period of sixty months.
2.2 Position post amendment – Hybrid debt or subordinated debt with minimum maturity period of sixty months will be excluded provided there is no option for recall by issuer.
3. Availability of Exemption to Category B NCDs:
3.1 Position prior to insertion– No such exemption
3.2 Position post insertion by recent PD notification – Category B NCDs issued with a maturity of one year and above, in accordance with the guidelines issued by RBI from time to time will not be covered under public deposit.
Relevant Provisions of NBFC Public Deposit directions.
2. (1) For the purpose of these directions, unless the context otherwise requires, –
(xii) “public deposit” means a deposit as defined under section 45-I(bb) of the Reserve Bank of India Act, 1934 (2 of 1934), excluding the following:
(f) any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable property of the company; or by any other asset or which would be compulsorily convertible into equity in the company provided that in the case of such bonds or debentures secured by the mortgage of any immovable property or secured by other assets, the amount of such bonds or debentures shall not exceed the market value of such immovable property/other assets;
(fa) any amount raised by issuance of non-convertible debentures with a maturity one year and above and having the minimum subscription per investor at Rs.1 crore and above, provided that such debentures have been issued in accordance with the guidelines issued by the Reserve Bank as in force from time to time in respect of such non-convertible debentures.
(i) any amount received as hybrid debt or subordinated debt the minimum maturity period of which is not less than sixty months provided there is no option for recall by the issuer within the period.
Applicability of Revised Guidelines to NBFC-CIC:
In author’s view, debentures issued by CICs shall also be governed by the Revised Guidelines. However, the restriction pertaining to issue of debentures for deployment of funds on its own balance sheet shall not apply to CICs.
Status of Housing Finance Companies (“HFCs”):
The Initial Guidelines were applicable to NBFCs as defined in Section 45 I (f) read with Section 45 I (c) of the RBI Act, 1934. The Revised Guidelines does not specify any such thing. Therefore, the Revised Guidelines too will not be applicable to the HFCs which are registered with NHB.
The Revised Guidelines has been issued by RBI with an intent to align the provisions with the Act, 2013 to the extent possible and wherever required, to override the same. Further, the liberty provided to the issuers for creating security in case of Category B is surely a welcome move. Whether the provision of nature of security to be created under Act, 2013 will still be applicable is not clear enough. Nevertheless, NBFCs will surely heave some sigh of relief!
(Article written by CS Vinita Nair – email@example.com, Aman Nijhawan – firstname.lastname@example.org and Nidhi Parmar – email@example.com of Vinod Kothari & Company)