Private Placement of Non-Convertible Debentures

A business can collect public loans other than deposits by issuing debt instruments against the business. Such debt instruments are usually referred to as debentures.

The following is not regarded as debentures:

(a) The instruments referred to in Chapter III-D of the Reserve Bank of India Act of 1934 on swaps, monetary market instruments, repo, reverse repo and securities;

(b) Such other instruments as the Central Government may prescribe and issued by the Company in consultation with the Reserve Bank of India.

A detailed information is given below on the procedure for private placement of non-convertible debentures (NCDs).

A Company can issue two types of Debentures:

1. Debentures secured by charge on any assets.
2. Debentures with necessary conversion into business shares within five years.

Also Read: What are the sources of raising debts for Startups and SMEs

What are Non- Convertible Debentures (NCD’s)?

Non-convertible borrowings are debentures that can not be exchanged into the Company’s equity shares and repaid at the end of the stated term. Thus, NCD is an executed debt instrument that recognizes its duty to refund the amount and the prescribed interest rate.

Conditions to be fulfilled for the issue of Secured NCD’s

A firm can only issue secured non-convertible debentures (NCDs). If NCD is released by a company not charging the Company’s assets, it is compulsory to list the shares of the recognized stock exchange, so that the same does not fall within the scope of the deposits. The following conditions must be met for the problem of protected NCDs:

1. The redemption date shall not exceed ten (10) years from the issuance date. Given that the Infrastructure Financial Companies, Infrastructure Debt Fund Companies and Infrastructure Debt Project Companies approved by the Department of Central Government or RBI are liable for debenture over 10 years, up to 30 years, can issue debenture.
2. Such a debenture issue should be guaranteed by making a fee with a value of the debenture due payment and interest.
3. In favor of the debenture trustee, the Company is named as Debenture Trustee and Charge is made.
4. The debenture Trustee’s qualification and position must be established.
5. Any firm needed to establish DRR shall deposit or invest, as the case may be, on or before the 30th day of April, not less than 15 percent of its debentures that expire during the year ended on the 31st day of March of the next year.

What is a Private Placement?

Private placement implies any offer or invitation to subscribe or issue securities by a corporation (other than a public offer) to a certain group of persons (“identified persons”) through the private placement offer-cum application letter.

Note:- No offer shall be made in a financial year to more than 200 persons, except eligible institutional buyers (QIB’s) and employees of the Company for whom ESOP securities are offered.

Procedure for issuance of NCD’s through Private Placement route

The detailed procedure or steps for a private placement of NCD’s are:

1. The Board shall classify the persons for whom the company is issuing NCDs and prepare a list of those persons to whom a debentures offer will be issued.
2. Preparation of the draft PAS-4 form for agreement by the Board Meeting (Private placement offer cum application letter).
3. When issuing secured debentures, the Company appoints a debenture trust deed to protect the interest thereon before issuing its letter of offer for a subscription to debentures and no later than sixty days after its portion (Section 71(3) of the Act read according to the appropriate rules).
4. Open a separate bank account for the subscription number receipt.
5. Identify the Company’s properties, which would be paid to (if secured debentures are issued).
6. Call a meeting of the Board by notifying all of the Company’s directors at least seven days before the meeting date, along with an agenda notice and recommendations for resolutions to be adopted at the meeting.

Resolutions to be passed at Board Meeting:

Approval of the Board for issue of NCD’s and deciding the terms of issue

• Type PAS-4 approval (private placement offer cum letter of application).
• Debenture trustee appointment, if applicable.
• Approval of the debenture trust Act to be carried out with the debenture trustee.
• Separate bank account opening.
• Approval by the Board to raise, subject to the general assembly approval of the members of the Company u / s 180(1)(c) of the Act, where applicable.
• Issue the General Assembly Notice and the explanatory statement for adopting the Act’s special resolution u / s 180(1)(c).