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03 Oct 2018

Process of Debenture Issuance through Private Placement Simplified

Issuance of non-convertible debentures (NCDs) is one of most widely used methods through which companies have been raising money in the form of secured debt under private placement route. The issuance of NCDs are governed primarily through Sections 42 and 71 of the Companies Act, 2013 (‘Act’) read with the Companies (Prospectus and Allotment of Securities) Rules, 2014 (“Securities Rules”) and the Companies (Share Capital and Debentures) Rules, 2014 (“Debenture Rules”). The Ministry of Corporate Affairs recently issued the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 (“Amendment Rule”) on 7th August, 2018, which brought out various changes to the rules in relation to issuance of securities under private placement method.

It is to be noted that, in case of any issuance of NCDs by a company which will happen through a private placement mechanism (under Section 42 of the Act), it was necessary for the company to pass a special resolution before such issuance or offer, wherein adequate disclosure was required to be made in the explanatory statement to the resolution with respect to the particulars of the offer including the valuation based on which the price (including premium) was arrived at.

With the notification of the Amendment Rule, one of the significant changes in relation to issuance of NCDs is that, the requirement of passing of a special resolution for issuance of NCDs is not applicable in case where the proposed amount to be raised through such offer of NCDs does not exceed the limit as specified in Section 180 (1) (C) of the Act. That is, in cases where the amount proposed to be raised by a company through issuance of NCDs together with the money already borrowed by the company does not exceed aggregate of its paid-up share capital, free reserves and securities premium (apart from temporary loans obtained from the company’s bankers in the ordinary course of business), then in such case, the requirement for compliance with the sub-rule (1) of Rule 14 of Securities Rules will not be applicable. As such, in cases where the money raised through issuance of the NCDs does not exceed the prescribed threshold, the company is not required to pass a special resolution or state the valuation on basis of which the price has been arrived at. Further, in case if the proposed amount to be raised through such offer of NCDs exceeds the prescribed limit, then it is sufficient if the company passes one special resolution only once in a year for all the offers of NCDs during the year.

The said change is rather a welcome change for private companies intending to raise money through secured debt format and where such issuance is within the prescribed limits, since it now requires the company to pass only a board resolution[1] to raise money through NCD issuance and a special resolution by the company or valuation of the NCDs are not required. However, it is to be noted that, in case of issuance of NCDs the company would be required to pass a board resolution under Section 179 (3) (c) of the Act and the same has to be filed with the Registrar of Companies for its record.

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[1] Section 180 of the Act requiring a special resolution to be passed is not applicable in case of a private company w.e.f. 05th June, 2015;

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