Non-convertible debentures: Issues in private placement

By Rajesh Begur, ARA LAW
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Banks, non-banking financial companies, debt funds and companies are increasingly using the route of private placement of listed and unlisted non-convertible debentures (NCDs) to raise funds from players such as pension funds, insurance companies, foreign portfolio investors and mutual funds to retire debt and for on-lending. However, this route is beset with legal and regulatory challenges, some of which are outlined below.

Rajesh Begur
Rajesh Begur

RBI approval: Creation of security over immovable property in favour of a foreign lender requires prior approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000. This poses a challenge in structuring the security package.

Classification as “deposits”: Under the Companies Act, 2013, bonds or debentures issued by a company must be secured by a first charge or a charge ranking pari passu with the first charge on the tangible assets of the company. Any subsequent charge is considered as a deposit, and optionally convertible debentures are also now considered as deposits. However, compulsorily convertible bonds or debentures convertible within five years are exempted from the definition of deposits.

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Rajesh Begur is the managing partner at ARA LAW, a first-generation law firm with offices in Mumbai and Bengaluru.

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The Capital, 1001 C, B Wing

Bandra Kurla Complex, Bandra

(East), Mumbai – 400 051, India

Mumbai | Bengaluru

Contact details:

Tel: +91 22 6619 9815

Fax: +91 22 6619 9899

Email: rajesh@aralaw.com

Website: www.aralaw.com

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