Raising money through private placement of NCDs by applicable NBFCs

Abhishek Kumar

30 Mar, 2024

NBFC must comply with both the RBI and the Companies Act 2013 requirements to operate. Even though both regulators work best together when possible, this is not always the case due to the existence of NBFCs and ongoing oversight by top banks. The term “debenture” encompasses debenture stock, bonds, and any other instrument of a firm that evidences a debt, whether or not it places a charge on the company’s assets. If you are an Unlisted NBFC and intend to issue Non-Convertible Debentures (NCDs) on a Private Placement basis, you should follow the procedure discussed below.

Private Placements

Section 42 of the Companies Act of 2013 (the “Act”), a business may conduct a private placement with a selected group of people. Companies engage in private placement when they offer or invite a select group of people to subscribe for their shares using a private placement offer letter as opposed to through a public offering.

Securities may only be privately placed with chosen or designated individuals (as determined by the company’s board of directors). A private placement firm is prohibited from advertising its securities to the general public or using any marketing, media, or distribution agents or channels to alert the public to the offer. The offer will be regarded as a public offer and not a private placement by the corporation if it is promoted or advertised. 

Guidelines on Private Placement of NCDs (maturity more than 1 year) by NBFCs:

NBFCs must implement a board-approved resource planning policy, which should, among other things, address the planning horizon and the frequency of private placement. 

The following guidelines shall apply to the issues:

• The issue of private placement of NCDs shall be in two distinct categories: those with a maximum subscription of less than Rs. 1 crore and those with a minimum subscription of Rs. 1 crore and above per investor.
• The minimum subscription per investor shall be Rs. 20,000 (Rupees Twenty Thousand).
• For NCD issuances with a maximum subscription of less than Rs. 1 crore, there will be a cap of 200 subscribers per financial year; this subscription must be fully secured. 
• There will be no cap on the number of subscribers for issuances with a minimum subscription of Rs. 1 crore and higher.
• Issuers will have the option of establishing security in the subscribers’ favour. In accordance with the NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998, such unsecured debentures shall not be regarded as public deposits.
• An NBFC (except Core Investment Companies) shall not aid resource requests of group entities, the parent company, or associates by issuing debentures for any purpose other than the deployment of funds on its own balance sheet.
• An NBFC is not allowed to make loans using its debentures as security (whether obtained through a private placement or a public offering).

The circular does not apply to the tax-exempt bonds that NBFCs provide.

The Internal Debt Management Department of the RBI’s guidelines on Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010, dated June 23, 2010, shall apply to NCDs with maturities of up to one year.

Provisions of the 2013 Companies Act

Having become an NBFC in accordance with RBI rules, the issue of NCDs must be secured NCDs where the subscription amount per investor is Rs 1 Crore or less (the term is greater than one year). As a result, Sections 42 and 71 of the Companies Act 2013 are also applicable concurrently. I’ve made an effort to include the clauses and points that only apply to NBFCs:

1. Secured debentures may be issued as long as the redemption date is not more than ten years from the date of issuance. Please be aware that before proceeding, the compliance and restrictions (i.e., board resolution or special resolution, as applicable) outlined in Section 180 of the Companies Act 2013 must be met.
2. Such a debenture issue shall be secured by the creation of a charge on the company’s properties or assets, with a value adequate for the timely repayment of the principal amount of the debentures and interest thereon; 
3. The company must designate a debenture trustee before issuing a prospectus or letter of offer for the subscribing of its debentures and must execute a debenture trust deed no later than sixty days after the issuance of the debentures to safeguard the interest of the debenture holders; 
4. A charge or mortgage must be established in favour of the debenture trustee to serve as security for the bonds.

1. Any specified movable property owned by the business, its holding company, subsidiaries, affiliated businesses, or any other entity. 
2. Any specified movable property owned by the company (not constituting a pledge).
3. Any specific immovable property owned by the firm, wherever it may be located; or 
4. Any interest in such property. 
5. Any particular immovable property, wherever it may be located, or any interest therein; however, in the event of a non-banking financial company, the charge or mortgage described in subsection (i) may be established on any movable property.

The following requirements must be met before the firm can name debenture trustees under Section 71: 

1. The letter of offer seeking subscription for debentures, as well as all future notices or other communications addressed to the holders of debentures, must include the names of the debenture trustees;
2. The proposed debenture trustee or trustees must provide written consent prior to the appointment of the debenture trustee or trustees. The company must abide by the rules regarding the Debenture Redemption Reserve (DRR) and investments or deposits of funds related to debentures maturing during the year ending on March 31 of the following year. However, NBFCs are exempt from the DRR rules if the issue is a privately placed debenture. 

Penalty for Non-Compliance of Private Placement 

If a firm takes money or makes an offer in violation of the Act and Rules, the company, its directors, and its promoters may be subject to fines. If there was more money involved in the invitation or offer than that, the fine may be up to Rs. 2 crore. Additionally, the business must return all subscription fees to customers within 30 days of receiving the court judgment imposing the fine.

Conclusion

Private high-net-worth individuals who are interested in investing in NCDs are given access to private placements, which are not available to the general public. NBFCs, following the guidelines from the Reserve Bank of India, can raise money through the private placement of NCDs.