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Presents The Power of 30!
A web series of 30 episodes covering different areas of corporate, securities and financial laws for the corporate professionals
across the country.
MUNMI PHUKONVinod Kothari & Company
Kolkata
1006-1009 Krishna Building224 AJC Bose RoadKolkata – 700017
Phone:033-22811276/ 22813742/7715E: [email protected]
New Delhi
A/11, Hauz Khas,New Delhi 110016
Phone:011-41315340/ 65515340
Mumbai
403-406, 175 , Shreyas Chambers,
D.N. Road, Fort, Mumbai – 400 001
Phone: 022 22614021/ 62370959
www.vinodkothari.comEmail: [email protected] / [email protected]
DEBENTURES & DEPOSITS –AN OVERVIEW
DEBENTURES
3
WHAT IS A DEBENTURE?
One of the most significant financial market instruments used for fund raising by thecorporates
Entitles the holders a fixed rate of return in the form of interest except for zerocoupon bonds
Freely transferable
Does not carry voting rights in general meeting
Section 2(30) of the Act, 2013 defines debenture to include debenture stock, bondsor any other instrument of a company evidencing a debt, whether constituting acharge on the assets of the company or not except money market instrumentsreferred to Chapter III of RBI Act or other instruments as may be prescribed by theMinistry
DEBENTURES NOT REGARDED AS DEPOSITS
Debentures secured by a first charge or a charge ranking pari passu with the firstcharge on any assets referred to in Schedule III of the Act, 2013 excludingintangible assets;
Debentures compulsory convertible into shares of the company within 10 years;
Non- convertible debentures not constituting a charge on the assets of thecompany and listed on a recognized stock exchange;
Optionally convertible debentures, if issued to a company.
CLASSIFICATION OF DEBENTURES
Types of Debentures –
based on
Public Participation
Transferability
Security
Convertibility
Non Convertible
Debentures
Convertible
Debentures
Contingently
Convertible
Optionally
Convertible
Compulsorily
Convertible
Non transferable
Freely transferable
Redeemable
Perpetual
Unsecured
Debentures
Secured Debentures
Publically issued
Debentures
Privately placed
Debentures
Listed
Unlisted
Listed
Tenure
Long term
Short term
6
REQUIREMENTS OF SECTION 71 (1/2)
Issuance of partly or fully convertible debentures requires a special resolution
Creation of Debenture Redemption Reserve out of profits
DRR shall be utilised for redemption of debentures
Secured debentures to be redeemed within 10 years from date of issue
Companies engaged in setting up infrastructure projects, infrastructure finance companies,infrastructure debt fund NBFCs and companies permitted by the CG, RBI or any other statutoryauthority may issue for a period exceeding 10 years but not exceeding 30 years.
Appointment of Debenture Trustees is a prerequisite in case of -
secured debentures
Public issue (However, in terms of Rule 18(6) of SHA Rules, appointment of DT is not required)
Issue to members exceeding 500
Rule 18(3) the SHA Rules, 2014 lays down the duties of DT
7
Liability of DTs shall be subject to such exemptions as may be agreed upon by debenture holders holdingatleast 3/4th in value of the total debentures at a meeting held for the purpose.
Where at any time the DT concludes that assets are insufficient to discharge the principal amount as and whendue, the DT shall file a petition before the Tribunal
For default in complying with the order of Tribunal, every officer in default shall be liable for imprisonmentfor 1 – 3 yrs. / fine of Rs. 2 lakhs – Rs. 5 lakhs / with both
Contract with company to take up and pay for debentures may be enforced by a decree for specificperformance
8
REQUIREMENTS OF SECTION 71 (2/2)
APPOINTMENT OF DEBENTURE TRUSTEES (DT) –RULE 18(3) THE COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2 014
Eligibility criteria for appointment of (DT) made stricter, DT should not:
beneficially hold shares in the company.
be a promoter, director or KMP or any other officer or employee of the company or its holding,subsidiary or associate company.
be beneficially entitled to moneys paid by the Company ( apart from remuneration)
be indebted to the company, or its subsidiary, or its holding or associate company or sister concern
have furnished any guarantee in respect of the principal debts secured by the debentures or interest
have any pecuniary relationship with the Company during the two immediately preceding financialyears or during the current financial year
amounting to 2% or more of its gross turnover or total income or
Fifty lakh rupees or higher prescribed amount, whichever is lower
Should not be a relative of any promoter or any person who is in the employment of the company as adirector or KMP
9
QUANTUM OF DRR TO BE MAINTAINED –RULE 18 (7) THE COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014
Company shall create DRR equivalent to 25% of the outstanding amountNo DRR for private placement of debentures made by NBFCs, HFCs
Company to park, on or before 30th day of April each year, a sum of at least 15% of the amount of its debentures,maturing during the year ending on the 31st day of March next following, in any one or more of the followingmethods:
in deposits with any scheduled bank, free from charge or lien;
in unencumbered securities of the Central Government or of any State Government;
in unencumbered securities mentioned in clauses (a) to (d) & (ee) of Section 20 of the Indian Trusts Act, 1882;
in unencumbered bonds issued by any other company which is notified under clause (f) of Section 20 of the IndianTrusts Act, 1882;
The money so parked can be utilized only for the purpose of redemption of debentures.
The amount remaining deposited /invested shall not at any time fall below 15% of the amount of debentures maturingduring that year ending 31st March
In case of partly convertible debentures, DRR to be created for non-convertible portion.
10
OBLIGATION OF COMPANY FOR PAYMENT OF INTEREST/ REDEMPTION AS PER TERMS
As per Section 71 (8), a company shall pay interest and redeem the debentures
in accordance with the terms and conditions of issue
In case a company fails to pay interest or redeem debentures as per terms specified:
No specific penalty is provided under Section 71
In that case, general penalty section – Section 450- will become applicable.
Company and every officer who is in default or such other person
Fine which may extend to 10,000 rupees
In case of continuing contravention – further fine which may extend to 1000 rupees for every day after the first during which contravention continues.
11
OBLIGATION OF COMPANY FOR PAYMENT OF INTEREST/ REDEMPTION AS PER TERMS
Is interest and redemption of
debentures in accordance with
terms and conditions of their
issue?
Violation of Section 71(8)
Section 71(8) is complied
Debenture Trustee /any
Debenture Holder filed
petition to NCLT?
NCLT will pass order
Order of NCLT
complied ?
Redemption of
debentures with
interest
every officer in default – imprisonment upto 3
years or fine of atleast two lakhs but upto five
lakhs or both
Yes
No
Yes
YesNo
General penalty – as per
section 450 of Companies
Act, 2013
No
On Company and every
officer who is in default or
such other person
12
ISSUE OF DEBENTURES BY NBFCS
13
PROVISIONS OF ACT, 2013 – INAPPLICABLE TO NBFCS
14
Private placement
of securities
Sec. 42 14(5)
[Companies (Prospectus and
Allotment of Securities)
Rules, 2014]
Provisions of rule pertaining to private placement
of securities that can be made by a Company to
maximum 200 persons in the aggregate in a FY
are not applicable.
Companies
(Acceptance of
Deposit) Rules,
2014
Sec. 73
& 76
3(ii)
[Companies (Acceptance of
Deposit) Rules, 2014]
Rules prescribed for acceptance of deposit from
members and other persons are not applicable.
Debenture
Redemption
Reserve
Sec.
71(4)
18(7)(b)
[Companies(Share Capital
and Debenture) Rules,
2014]
No DRR is to be maintained in case of privately
placed debentures.
ISSUE OF DEBENTURES BY NBFCS BY PRIVATE PLACEMENT-REGULATIONS APPLICABLE
Section 42 of Act, 2013
In absence of a proviso similar to Sec 67(3) of Act, 1956
Section 71 of Act, 2013
Provisions relating to security, DRR, payment of interest, petition to NCLT etc.
SEBI (Issue and Listing of Debt Securities) Regulations, 2008
In case the issue is to be listed on SE
Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010
In case of issue of short term debentures issued by way of private placement
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
In case of issue on convertible debentures on preferential basis by listed NBFCs
RBI Guidelines on Private Placement
In case of issue of long term debentures issued by way of private placement by NBFCs.
15
RBI GUIDELINES ON PRIVATE PLACEMENT OF DEBENTURES
RBI issued vide Notification on February 20, 2015
the Guidelines on Private Placement of NCDs (maturity more than 1 year) by NBFCs
in supersession of Guidelines issued on 27th June, 2013 and clarification issued on 2nd July,2013
Not applicable to tax exempt bonds offered by NBFC
NBFCs to formulate a Board approved policy for resource planning, covering the planningperspective and periodicity of private placement
RBI has stipulated the guidelines majorly for issuance of private placement of NCDs of 2categories:
With a maximum subscription of less than Rs. 1 crore (Category A)
With a minimum subscription of Rs. 1 crore and above (Category B)
16
QUICK COMPARISON OF CATEGORY A & B
17
Category A
Maximum subscription shall be below 1 cr. per investor
Minimum subscription shall be 20K per investor
Maximum number investor shall be 200 in a Financial
Year
Subscription shall be fully secured
Category B
Minimum subscription of 1 cr. or more per investor
--
No such limit
Creation of security is optional
DEPOSITS
MEANING OF DEPOSITS UNDER CA, 1319
AN INCLUSIVE DEFINITION-RULE 2 OF DEPOSITS RULES, 2014
Includes-
any receipt of money
by way of deposit or loan or in any other form, by a company
Hence, it will include-
Deposit in substance
Amount received from LLP
Installment schemes- Deemed Deposit
If a scheme promises returns, in cash or in kind, at the end of the specified period, the
scheme may be treated as a “deposit”
What all are not deposits are covered in upcoming slides.
20
WHAT IS NOT A DEPOSIT? – 1/2
Amount received from CG/ SG or other authority guaranteed by
CG/SG
Loans from Banks, Financial institutions
Money received from Company
Amount issued as CCD
Provided it is mandatorily converted in shares in 10 years
Amount issued as Secured debentures
Provided it is 100% secured
Amount received towards subscription of any securities
Allotment to be made within 60 days from the date of receipt of money or advance.
amount not refunded within 15 days from completion of 60 days will be treated as deposits.
Any adjustment will not be treated as refund. 21
Amount received and held in trust.
▫ Provided no interest is paid
Advance received for supply of goods/ services
▫ Provided appropriation of such advance within
365 days
Deposit from directors subject to a declaration
• relative of director in case of private company
also included
Amount received from employee
▫ Not exceeding his annual salary
Amounts received from AIFs, Domestic VCFs, IITs and
Mutual Funds
WHAT IS NOT A DEPOSIT? – 2/2
Amount raised through issuance of Commercial paper
Any other instruments issued as per RBI guidelines/ notification
Short term NCDS issued with 12 months maturity and by private placement will get exempted.
Promoter’s unsecured funding
On stipulation imposed by lending institution
Any other transaction not amounting to deposit in substance
Collective Investment Scheme
Security Deposit
Deposit from foreign corporate, citizens.
Convertible note issued by Start-up
Of 25 lakhs or more
Either convertible into equity or repayable within 5 years22
PROHIBITIONS, ALLOWANCES & REQUIREMENTS
23
PROHIBITION ON ACCEPTANCE OF DEPOSITS FROM PUBLIC (SEC 73)
Combined reading of sub sections (1) and (2) gives an impression that this section relates to acceptance of deposits from members only
For acceptance of deposits from members, the followings have been prescribed:
Deposit Circular to be registered with the Registrar
Maintenance of deposit repayment reserve account
Atleast 20% of amount of deposits maturing during following FY
Deposit on or before 30th April every year
Rate of interest should not exceed the maximum rate as prescribed by RBI
Section 73 states that sub-section (1) shall not be applicable to:
Banking company
NBFC as defined in RBI Act, 1934
24
PUBLIC DEPOSITS ONLY BY ELIGIBLE COMPANIES (SEC. 76)
Eligible Companies
Public Companies
Net worth of not less than Rs. 100 crore
Turnover of not less than Rs. 500 crore
Has taken prior approval by SR and
filed with the Registrar
25
AndOr
Other requirements:
Obtaining of credit rating from recognized CRAs on yearly basis
Creation of security of an amount equivalent to deposit accepted
PENAL PROVISIONS
• In case of contravention with section 73 or 76, section 76A imposes enormous penalty
On the company
• Fine of not less than 1 cr. which may extend to 10 cr.
On the officer who is in default
Imprisonment which may extend to 7 years AND
• Fine of not be less than 25 lakhs which may extend to 2 cr.
• Making it non -compoundable
26
DEPOSITS RULES, 2014
27
RESTRICTIONS- RULE 3
Rule 3 lays down certain restrictions on acceptance of deposits bycompanies- Companies shall not accept / renew deposits repayable on demand or upon receiving a
notice within a period of less than 6 months or more than 36 months from the date ofacceptance / renewal.
The company may accept / renew deposits for less than 6 months, if
Such deposits do not exceed 10% of aggregate share capital, free reserves andsecurities premium account
Minimum tenure of be 3 months.
28
Deposits from members by other than eligible companies-Allowed upto 35% of paid-up share capital + free reserves along with outstanding deposits from members
By eligible companiesDeposits from members upto 10% of paid-up share capital + free reserves along with outstanding deposits
form members.
Any other deposit, upto 25% of paid-up share capital + free reserves + securities premium account alongwith outstanding deposits (other than deposits from members).
Eligible company being a Government Company-upto 35% of paid-up share capital + free reserves.
LIMIT ON ACCEPTANCE OF DEPOSITS- RULE 3 (3, 4 & 5)]
29
RATE OF INTEREST OR BROKERAGE- RULE 3(6)
The rate of interest paid on deposits shall not exceed the maximum rate prescribed by RBI for acceptance of deposits by NBFCs.
Similar is provision for payment of brokerages.
Provided that only persons authorized by companies to solicit deposits on its behalf shall be entitled to brokerages.
30
VALIDITY OF CIRCULAR – RULE 4(6)
A circular or circular in the form of advertisement issued in accordance with sub-section (2) of section 73 or section 76 shall be valid until the earlier of-
The date of expiry of 6 months from closure of financial year in which issued or
Date on which financial statements laid before company in general meeting or latest day on which the meeting should have been held as per the Act
31
CREATION OF SECURITY- RULE 6
Company u/s 73(2) and every Eligible company inviting secured deposits shall provide for securityBy way of charge on assets referred to in balance sheet, excluding intangible assets.
The amount of such deposits and interest payable thereon shall not exceed the market value of such assets as assessed by a registered valuer.
Security to be created in favor of a deposit trustee on a specific moveable property or
On specific immoveable property of the company or interest thereon.
32
APPOINTMENT OF DEPOSIT TRUSTEES- RULE 7
Company needs to appoint deposit trustees before inviting secured deposits.Written consent to be obtained from trustees
Deposit trust deed to be executed atleast 7 days before issuing circular/ advertisement.
A person, including a company providing trusteeship services, cannot beappointed as trustee if such personIs a director, KMP, officer or employee of the company, or of its holding, subsidiary or associate
company or a depositor in the company or is related to any such person ;
Is indebted to the company, or its subsidiary, holding or associate company or a subsidiary of suchholding company.
Has any material pecuniary relation with the company;
Has entered into any guarantee arrangement in respect of principal debts secured by the deposits orinterests thereon.
33
CREATION OF DEPOSIT REPAYMENT RESERVE- RULE 13
Applicable to every company raising member deposits & eligible companies.
Company to park, on or before 30th day of April each year,
a sum of at least 25% of the amount of deposits, whether secured or unsecured, maturing during the following financial year
in deposit repayment reserve account with any scheduled bank, free from charge or lien;
The money so parked can be utilized only for the purpose of repayment of deposits
34
PREMATURE REPAYMENT OF DEPOSITS – RULE 15
In case of repayment of deposit, on the request of depositor, after a period of 6 months from date of deposit but before expiry of deposit period
Rate of interest paid will be
rate which the company would have paid had the deposit been accepted for the period for which such deposit had actually run - 1%
the company shall not pay interest at any rate higher than the rate so reduced.
35
FAILURE OF SCHEDULED REPAYMENT OF DEPOSITS SEC 73(4)
Depositors to do-
36
To approach
DepositorFor
directing order
NCLT
• Sum due ;
• Loss or damage incurred
To pay
PENAL PROVISIONS FOR FRAUD- SEC 75
Penal provisions for fraud-
37
Liability under section 447
Defrauding proved
Company fails to repay
DEPOSITS BY NBFCS
38
DEFINITION OF DEPOSIT AND PUBLIC DEPOSIT
Deposit as per section 45-I(bb) of the RBI Act, 1934
Any amount of money excluding the following–
raised by way of share capital
contributed as capital by partners of the firm
received from a scheduled bank or a co-operative bank or any other banking company defined under Banking Regulations, 1949
received from SFC or any other financial institution under IDBI or any other prescribed institution
received in the ordinary course of business as
security deposit, dealership deposit, earnest money, advance against orders for goods
received from firm or an AOP not being a body corporate and registered under enactment related to money lending
received by way of subscriptions in respect of a chit.
• Public deposit – Deposit as per the RBI Act, 1934 except certain items mentioned in the next slide
39
EXCEPTIONS TO PUBLIC DEPOSIT UNDER RBI DIRECTIONS(1/4)
40
amount received from CG, SG, local authority, foreign government or citizen
any amount received from IDBI or LIC or GIC and its subsidiaries SIDBI or UTI or NABARD or Electricity Board and such Government companies that are notified by RBI.
any amount received as hybrid debt or subordinated debt :-
- Minimum maturity period is not less than 60 months
- Provided there is no option for recall by the issuer within the period;
any amount received by a company from another company
any amount raised by issuance of NCD in accordance with RBI guidelines:-
- Maturity period should be more than one year
- Minimum subscription per investor is Rs.1 crore and above
unsecured loan brought in by the promoters subject to the-
- loan brought in pursuance of the stipulation imposed by the lending PFI in fulfilment of the obligation of the promoters to contribute such finance,
- loan is provided by the promoters themselves and/or by their relatives, and not from their friends and business associates, and
- exemption under this sub-clause shall be available only till the loan of financial institution is repaid and not thereafter;
41
EXCEPTIONS TO PUBLIC DEPOSIT UNDER RBI DIRECTIONS(2/4)
42
any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable property of the company or any other asset-
- the amount of such bonds or debentures shall not exceed the market value of such immovable property/other assets
any amount received by a NBFC-SI-ND by issuance of 'perpetual debt instruments' in accordance with RBI Guidelines.
any amount raised by the issue of infrastructure bonds by an IFC as specified by CG u/s 80CCF of the IT Act.
EXCEPTIONS TO PUBLIC DEPOSIT UNDER RBI DIRECTIONS(3/4)
43
amount received and held in accordance with the provisions of the CA, 2013 towards subscription of securities, including share application money
- pending allotment for not more than 60 days
amount received from a director of a company or a shareholder of a private company
- provided amount should not be borrowed funds and a declaration to that effect is to be given
any amount received by MFs regulated by SEBI and issuance of commercial paper in accordance with
guidelines.
EXCEPTIONS TO PUBLIC DEPOSIT UNDER RBI DIRECTIONS(4/4)
INSTRUMENTS OF FUNDING FOR FINANCIAL ENTITIES-NOT TREATED AS DEPOSITS
1. Secured Bonds/ Debentures
2. CCBs/CCDs
3. NCDs having minimum subscription of Rs. 1 crore and minimum maturity of 1 year
4. Hybrid Debt Instruments
5. Subordinated Debt Instruments
6. Commercial Paper
7. Infrastructure Bonds
8. Perpetual Debt Instruments
44
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