In our last newsletter, we discussed social performance outlining the concept and elaborating the various tools in use for evaluating and benchmarking social performance. This month we present a step-by-step guide to issuance of Non-Convertible Debenture (NCD) on a private placement basis. Financing for the Indian micro finance institutions have traditionally been from the banks, as lending to the sector enables the banks in meeting their priority sector targets. However, in the last few years the MFIs have started to look at diversified source of instruments like NCDs, while the term loans and securitisations from banks and other financial institutions still constitute 85% of total funding to the MFIs. Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer. Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner. The debentures which cannot be converted into shares are called non-convertible debentures (NCDs). An NCD is a debt instrument with a fixed tenure that pays a certain rate of interest monthly, quarterly, annually or at the end of the tenure. NCDs can be issued by corporate entities (including NBFCs) where corporate entity means a company as defined in the Companies Act, 1956 (including NBFCs). In this newsletter we focus on the issuance procedure of NCDs on a Private Placement basis. Private NCD placements require lesser documentation and compliance procedures but carry restrictions on number of investors per issuance (not more than 49). According to RBI, all NCDs including privately placed NCDs must be fully secured. Unsecured debentures with a tenure upto 5 years and partially secured NCDs are considered as deposits attracting provisions relating to acceptance of deposits by NBFCs. In case the security cover is inadequate / not created at the time of issue, the issue proceeds must be kept in an escrow account until creation of security. Unsecured NCDs can be structured as subordinated debt of 5 years and above (qualifying as Tier II) or perpetual debt (qualifying as Tier I capital, respectively). As subordinated debt needs to be an instrument as defined under RBI guidelines, subordinated debt is typically raised in the form of NCDs. For private placement, minimum subscription amount for a single investor is Rs. 25 lakh and in multiples of Rs.10 lakh thereafter. The offer document should clearly mention "For Private Circulation Only". General information including the address of the registered office of the NBFC, date of opening / closing of the issue etc. should be clearly mentioned in the offer document. Following are the steps for issuance of NCDs: Issue Size Tenure Coupon Coupon Payment Frequency Security Internal requirements for Investees Pre issue One or more series if tenure or coupon varies. If the company is going to issue similar debentures over the next six months it can consider filing a shelf prospectus (only applicable for private placements) Up to one year requires adherence to RBI guidelines including minimum rating of A2 and beyond one year may have put/call options. Can be fixed or floating linked to a benchmark rate Day count convention as per SEBI requirements Typically quarterly, semi-annual or annual Secured Receivables margin Un-secured Only as capital issuance else considered as deposit Board Resolution Issuance of NCDs (Physical meeting of Board)
SEBI Registration BSE/ NSE ISIN Term Sheet Appointment of arranger/law firm Application Form Trustee appointment agreement Information Memorandum (IM) Debenture Trust Deed (DTD) Deed/Memorandum of Hypothecation Power of Attorney Listing Agreement Tripartite Agreement Rating Agreement Rating Agency SEBI registered Debenture Trustees Stock Exchange Depository List of Registrar & Transfer Agents (RTA) Appointment of Trustee Obtaining a credit rating (to inform RBI post obtaining the rating) Engagement of law firm for legal opinion Appointment of RTA Execution of tripartite agreement between company, RTA and Depository for demat of NCDs One-time registration for online complaint redressal system - SCORES Obtaining in-principle approval for issuance. Listing is not mandatory for NBFCs if the investor is domestic, but preferable. If the investor is an FPI/FII/QFI, then the listing needs to be completed within 15 days of receipt of funds. File Master File Creation form (MCF) and obtaining ISIN No. from NSDL and CDSL Internal requirements for Investors Pre issue Provides the basis of the NCD transaction including the key terms like amount, tenure, interest rate etc. Usually this is required by the investor to get an independent legal opinion on the documentation. To receive duly filled-in application form on pay-in date Documentation requirements This is a simple document providing clauses with regard to appointment of the Trustees for this issuance of NCDs. Also known as Debt Disclosure Document, this is required for compliance with SEBI guidelines on disclosure and covers the profile of the issuer company in detail. The offer document should clearly mention "For Private Circulation Only". General information including the address of the registered office of the NBFC, date of opening / closing of the issue etc. shall be clearly mentioned in the offer document. This will have all the covenants financial, operational, events of defaults, power of trustees, conduct of meetings etc. This will contain the security clauses namely receivables margin, the charge creation, type of charge, frequency of top-up etc. POA provides for legal flexibility so the appointee can represent the issuer for collection of receivables. Standard document to be executed post the allotment and submitted to the stock exchange on credit of debentures in demat account of investor Standard document to be executed with both depositories along with Registrar and Transfer Agents (RTA) for creation of ISIN and for holding/transfer of debentures and the depository namely NSDL &/or CDSL. Standard document for initiating the rating process Interaction with Service Providers CRISIL, ICRA, CARE, India Ratings (Fitch), Brickworks and SMERA http://www.sebi.gov.in/sebiweb/home/detail/154/new/registered-debenture-trustees NSE or BSE NSDL & CDSL https://www.cdslindia.com/publication/rtalist.jsp https://nsdl.co.in/related/regtrf.php Preferable to use the same RTA if the shares of the company are dematerialised
Stamp duty Preferred route for payment of stamp duty of 0.5% per year but not exceeding 0.25% is through e-stamping with entities like Stockholding Corporation etc. Allotment Corporate Action Listing on stock exchange Payment of Stamp duty & Creation of security (Form 10) Legal Opinion Fixing of Record Date Quarterly compliance certificate on covenants? Half-yearly compliance certificate Publication of audited financials on half-yearly basis Rating change Security Monitoring of online complaints Debenture redemption reserve De-list on repayment Debit corporate Action Satisfaction of charge Internal requirements Post issue It is important to freeze the allotment date upfront before filing for ISIN. Also, the allotment can be done on the date of pay-in itself Post allotment, the investee needs to initiate credit corporate action to create the units and credit it to the demat account of the investor. It must obtain both ISIN allocation letter and credit confirmation letter from the depository through the RTA. The investee will have to ensure it is done within 15 days from date of issue (as per SEBI guidelines for the foreign investors). Post the corporate action, it is necessary to provide the details to the stock exchange along with listing application and draft towards listing fees, compliance certificate, Board Resolution, rating letter, consent letters from trustee, RTA etc. for listing the security. Post scrutiny, the exchange will issue a circular intimating the listing of the security The investee must pay stamp duty and provide receivables statement as well as original stamp duty payment receipt to trustee for charge creation in Registrar of Companies. This is to be done within 30 days from the date of issuance Post completion, the investee should obtain a legal opinion and provide the same to the investor On-going compliance The investee should fix a record date towards every payment of interest as well as repayment The investee should provide compliance details on a quarterly basis to the investor in the form of compliance certificate from an independent Chartered Accountant The investee should provide compliance details to the Exchange on half-yearly basis under clause 27 of listing agreement The investee should publish its limited review/ audited financials results every six months in a leading daily The investee should inform RBI on any rating change and should also issue a press release in this regard The investee should top-up the receivables on a periodic basis, if applicable The investee should monitor any complaint on SCORES On Maturity Not applicable for NBFCs if issued on private placement basis. The investee should inform the stock exchange on repayment for de-listing The investee should initiate debit corporate action post repayment to extinguish the units The investee should file form 17 to satisfy the charge with ROC
The activities to be undertaken are given below: Activity List 1 Finalize the issue size & structure 2 Prepare Term sheet / Information Memorandum 3 Finalize the investors/subscribers 4 Get a rating from designated rating agency 5 Appoint the trustee (Finalize the commercials & take the consent letter) 6 Appoint the Registrar & Transfer Agent (Finalize the commercial & take the consent letter) 7 Apply for In principal approval from exchange by submitting following :- (A) Soft copy in.pdf format and certified true copy of draft Disclosure document prepared as per SEBI (Issue and Listing of Debt securities) Regulations, 2008. (B) Self certification from the company secretary or authorized signatory confirming that the Disclosure document has been prepared as per SEBI (Issue and Listing of Debt securities) Regulations, 2008. (C.) Confirmation of the credit rating registered with the Board for the proposed issue (D) Consent letter from the Debenture Trustee (E) Latest Annual Report (F) Memorandum and Articles of Association 8 Enter into Listing agreement with Stock Exchange 9 Enter into Tripartite agreement with Depository & R&T Agent 10 Submit the requisite form to depository for issue the NCD in demat mode 11 Get the final listing approval from stock exchanges by submitting the remaining documents 12 Submit the relevant documents to trustee for security creation 13 Execute the security related documents with trustee by submitting the requisite information 14 Pay the applicable stamp duty 15 File the necessary form with ROC for charge creation in consultation with trustee (Form 10) 16 Submit a copy of trust deed to stock exchange after executing the same 17 Submit the necessary report to Stock exchange on Half Yearly basis 18 Submit the necessary reports to trustee on Half yearly basis 19 Confirm to the trustee for interest payment 20 Confirm to the trustee for redemption 21 Execute the debit corporate action with depository 22 File the necessary form with ROC for removal of charges in consultation with trustee 23 Re-conveyance of property, if any, given as security IFMR Investments' proposed social venture Alternative Investment Fund (AIF) will invest in debt instruments issued by not only the larger sized MFIs but also facilitate funding across the sector to high quality smaller MFIs. The targeted size of fund and subsequent sizeable lending to MFIs will also help in eliminating the NCD issuance costing barrier, provided each investment meets the IFMR fund exposure norms and underwriting guidelines. Through the proposed AIF, IFMR Investments is focussed on creating a long term debt capital market platform for the microfinance sector.