Non-convertible debentures: Issues in private placement

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.

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.

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