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Housing Finance Companies – Issuance of NCD on private placement

Neelansh Gupta

| Updated: Jan 28, 2019 | Category: Housing Finance Companies

Housing Finance Companies issuance of NCD on private placement

The National Housing Bank Act regulates the housing finance companies. It provides necessary directions regarding Housing Finance Companies issuance of NCD (Non convertible debenture)P on private placement in the public interest. Moreover, the Housing Finance Companies Issuance of NCD on Private Placement basis (NHB) Directions, 2014 is the most important and mandatory compliance which came into force on 1st April 2014.

In the below article, we would discuss about the regulations as directed by the National Housing Bank.

What is Issuance of Non convertible debentures on private placement?

Before we discuss about Non Convertible Debentures issuance on private placement, let us get familiar with the following terms:

  • Non-Convertible Debentures:

It is a debt instrument issued by a Housing Finance Company with maturity for one year or more. However, this is generally issued by way of private placement.

  • Private Placement

This is offering of non-convertible debentures to the selected subscribers by the Housing Finance Companies.

  • Public Issue

It is just an invitation to the general public which is made by a Housing Finance Companies. This is to inform people to subscribe to the securities of that Housing Finance Company through a prospectus.

Hence, Non-Convertible Debentures issuance on private placement means and includes a debt instrument issued by a Housing Finance Company with maturity for one year or more and is issued only to the selected number of subscribers by the Housing Finance Companies as may be specified by the National Housing Bank.

Applicability of the direction of Housing Finance Companies issuance of Non-Convertible Debentures on a private placement

Please note that these regulations are applicable to every housing finance companies registered under Section 29A of the National Housing Bank Act, 1987.

Why Housing Companies issue non-convertible debentures?

The main purpose of Housing Finance Companies issuance of NCD on private placement is to deploy funds on its own balance sheet. Moreover, no housing finance company must issue non-convertible debentures to facilitate resource requests of its group entities or any parent company etc.

What are the eligibility criteria for Housing Finance Companies issuance of NCD on private placement?

The eligibility criteria for issue of Non Convertible debentures on private placement must be taken care of. They are as follows:

  1. Net Owned Funds: Only those housing finance companies whose net owned fund of Rs. 10 crores or more as per their latest audited balance sheet are eligible to issue non-convertible debentures
  2. Credit Rating: In case a housing finance company complies with the above requirement, then it must obtain a credit rating from one of the credit rating agencies. Some of them are as given below
  • Credit Rating Information Services of India Ltd. (CRISIL) or
  • The FITCH Ratings India Pvt. Ltd or
  • Brickwork Ratings India Pvt. Ltd or
  • such other agencies registered with Securities and Exchange Board of India (SEBI) or
  • Such other credit rating agencies as may be specified by the National Housing Bank from time to time, for the purpose.
  1. Moderate Credit Rating: The HFC must have a minimum credit rating of the moderate degree of safety. That explains timely servicing of the financial obligations. The HFC must also strictly ensure at the time of issuance of the non-convertible debentures that the rating so obtained is current and has not fallen due for review.

Pre requisites for Housing Finance Companies issuance of NCD on private placement

  • HFC must disclose to all the investors about its financial position as per the standard market practice.
  • The pre requirement of a Debenture Trustee is must, in case a Housing Finance Company is issuing non convertible debentures.
  • Any entity which is registered as a Debenture Trustee with the Securities and Exchange Board of India under the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, is eligible to act as Debenture Trustee for issue of the non-convertible debentures
  • The Debenture Trustee so appointed shall submit to the National Housing Bank such information as is required by it from time to time.

What must be the maturity period of the Housing Finance Companies issuance of NCD on private placement?

These also include the cautions which one must keep in mind while investing into non-convertible debentures:

  • They must not be issued for maturities of less than 12 months from the date of issue.
  • In case an exercise date of securities (kind of securities which includes a call or put option attached to it) is attached to the non-convertible debentures, then it must not fall within the period of one year from the date of issue.
  • Roll-over (Re investment into same or similar security) of non-convertible debentures is not at all allowed.
  • The tenure of the non-convertible debentures must not exceed the validity period of the credit rating of the instrument.

Maximum number of investors allowed when Non-convertible debentures are issued

  • In case the maximum subscription of NCD is less than 1 crore and fully secured: The limit must be of 200 subscribers for every financial year
  • In case the maximum subscription of NCD is more than 1 crore: There is no limit on the number of subscribers

What would be the minimum subscription per investor?

The minimum subscription would be Rs. 20,000 per investor.

Further, the issuance of the private placement of NCDs shall be in two separate categories, those with a maximum subscription of less than 1 crore and those with a minimum subscription of 1 crore and above per investor.

Maximum Limit and amount of issue of Non-convertible debentures

The limits and amount of issue of Non-convertible debentures are as follows:

  • Lower of the aggregate amount of non-convertible debentures issued by a housing finance company as approved by the Board of Directors or the quantum indicated by the Credit Rating Agency for the rating granted
  • The total amount of non-convertible debentures shall be collected by the Housing finance Company within 30 days of the issue of the non-convertible debentures.

Conditions for the Housing Finance Companies issuance of NCD on private placement

  1. Policy Framework: An HFC must have a board approved policy for the planning of collecting fund. It must cover the planning horizon and the total period of private placement of non-convertible debentures.
  2. Offer Document:
  • An offer document must be issued within a maximum period of 6 months from the date of board resolution which authorizes such issue.
  • Mention “For Private Circulation only” on the offer document. Offer document must also contain information like date of opening/closing of the issue, their maturity period, a rate of interest etc.
  • Please note that the offer document must disclose the names and designations of the officers who are authorized to issue such offer document.
  • The Board Resolution and the offer document must contain the purpose for which the funds are being raised
  1. Auditors: Auditors of the HFC shall also certify to the investors that all the conditions of issuance of NCD are met properly by the HFC.
  2. Regulatory Framework: Requirements of the provisions of the Companies Act, 2013 and Securities Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 must be complied with. Debenture Certificate must also be issued within the prescribed period.
  3. Issuance of NCD: NCD must be issued at face value carrying a coupon rate or at a discount to face value as zero coupon instruments which are determined by the HFC.

Protection to be provided by HFC before issuance of Non Convertible Debentures

  • An HFC shall ensure that non convertible debentures are fully secured at all the time.
  • The security cover on the non convertible debentures must be created within one month from the date of issue.
  • In case the security cover is not created, the amount earned on issue of such non convertible debentures must be placed under Escrow account. It must be placed until and unless a security on it is created.

Non-applicability of above protection

  • The above protection does not apply to any amount which is received as “hybrid debt” or “subordinate debt” as defined in Housing Finance Companies (NHB) Directions, 2010 which have the minimum maturity period of not less than sixty months.
  • The protection does not apply to any amount which is raised by issuance of non convertible debentures with a maturity of more than the year.
  • On the other hand, it does not apply to those in convertible debentures which have the minimum subscription per investor at Rs. 1 crore and above.

FAQs on Housing Finance Companies issuance of NCD on private placement

While dealing with various clients, we came across following common queries. Have a look at them:

  1. How should non -convertible debentures must be issued by the HFC?

It is highly recommendable that the Housing Finance Companies issuance of NCD on private placement must be in dematerialized form. However, an option to issue them in physical form is also available.

  1. Can a HFC obtain loan against its debentures?

HFC are not allowed to obtain Loan against the security of their own debentures. Moreover, they can not obtain it either by private placement or public issue.

  1. What is Board report of Housing Finance Company is all about?

A Board report is attached to every balance sheet of a company. It must be discussed in general meeting and shall include statement:

  • The total number of non-convertible debentures which have not been claimed by the Investors or not paid by the housing finance company after the date on which the non-convertible debentures became due for redemption; and
  • The total amount in respect of such debentures remaining unclaimed or unpaid beyond the date as referred above

Conclusion

The above are the mandatory provisions by the National Housing Bank . They must be taken care by the investors after Housing Finance Companies issuance of NCD on private placement. However, the National Housing Bank may issue more clarifications from time to time. As of now, the above provisions are final and binding.

In case of more clarifications, do contact Enterslice now.

Neelansh Gupta

Mr. Neelansh Gupta is a Legal Counsel having extensive in-depth knowledge of various laws. He has completed his graduation in law and has experience in IPR, Taxation and Corporate laws.

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