Navigating Non-Convertible Debentures: Issuance and Listing

Introduction 

In the world of corporate funding, while equity is ever present, Non-Convertible Debentures are fast becoming one of the most preferred instruments of funding. While companies enjoy lower interest rates, investors can enjoy stable returns. This article endeavors to elucidate the advantages of NCDs, the regulatory framework overseeing them, and the procedure for listing these instruments. 

Understanding NCDs 

1. What are NCDs?

Non-convertible debentures (NCDs) are debt instruments issued by companies or institutions to raise capital. Unlike convertible debentures, which can be converted into equity shares of the issuing company, NCDs offer a fixed interest rate (coupon rate) and a specific maturity date when the principal amount is repaid to investors. This means that NCD holders receive regular interest payments and get their principal back at the end of the maturity period. 

2. Why Companies Choose NCDs

Companies choose to issue NCDs for various reasons: 

1. Lower Interest Costs: NCDs often come with lower interest costs compared to traditional bank loans, making them an attractive financing option. 
2. Diversification: NCDs allow companies to diversify their sources of funding beyond equity and bank loans, reducing dependence on a single source.
3. Flexible Terms: NCDs offer flexibility in terms of tenures and interest payment frequencies, allowing companies to tailor the issue to their financial needs. 
4. Attracting Different Investors: NCDs attract a different set of investors, including those seeking fixed-income securities and regular interest payments.

3. Benefits for Investors

   Investors find NCDs appealing for several reasons: 

1. Stable Returns: NCDs provide predictable and stable returns through fixed interest payments. This makes them particularly attractive to risk-averse investors and those seeking regular income. 
2. Diversification: Investing in NCDs helps diversify an investment portfolio, spreading risk across different asset classes.
3. Liquidity: Listing NCDs on stock exchanges enhances their liquidity, allowing investors to buy and sell them in the secondary market, providing an exit option before maturity. 
4. Tenure Flexibility: NCDs come with various tenures, allowing investors to choose the maturity period that aligns with their financial goals. Longer tenures may offer higher yields. 

Regulatory Framework 

1. Legal Guidelines

The regulatory framework for NCDs in India is primarily governed by the Companies Act 2013 and regulations set forth by the Securities and Exchange Board of India (SEBI). These regulations ensure transparency and protect the interests of investors. Companies issuing NCDs must adhere to these guidelines to maintain compliance. 

1. Public vs. Private Placement

When companies decide to issue NCDs, they have the option of doing so through public or private placement. Public issues involve offering NCDs to the general public, while private placements are directed at specific investors. The compliance requirements for these two methods can differ significantly, with public issues generally requiring more extensive regulatory scrutiny. 

Advantages of Listing NCDs 

Enhanced Liquidity

Listing NCDs on stock exchanges like BSE enhances their liquidity. Investors can easily buy and sell NCDs in the secondary market, providing liquidity and flexibility. This liquidity is especially valuable when investors want to exit their positions before the NCDs’ maturity. 

Continuous Funding

Listing NCDs ensures a continuous source of funds for companies. Once listed, companies can tap into the capital market more effectively whenever they require additional funds. This provides financial stability and flexibility in managing their capital needs. 

Regulatory Considerations

Listed NCDs must adhere to strict regulatory standards, providing investors with confidence in the issuer’s credibility and financial stability. This regulatory oversight enhances transparency and investor protection. 

Tax Benefits

One of the attractive features of investing in NCDs is the tax benefits related to interest payments. Interest earned on NCDs is subject to tax deductions at source (TDS), making them tax-efficient for investors. This tax benefit is particularly relevant for individuals in higher tax brackets. 

Let’s delve into the details of the listing process for Non-Convertible Debentures (NCDs): 

The Listing Process 

1. Preparing for Listing

   – Before proceeding with the listing of NCDs, companies must undertake several crucial steps: 

1. Due Diligence: Conduct thorough due diligence to ensure compliance with regulatory requirements. This includes preparing necessary financial documents, disclosures, and obtaining relevant approvals. 
2. Compliance Certificates: Secure compliance certificates from the debenture trustees and legal advisors to verify that all regulatory requirements are met. 
3. Documentation: Prepare and review all necessary documentation, including the prospectus and offering document. These documents must provide comprehensive information about the NCD issue and the company issuing them. 

Debenture Trustee: Appoint a debenture trustee registered with SEBI to act as a guardian of NCD holder interests. 

2. Key Intermediaries

 The listing process involves the collaboration of key intermediaries who play crucial roles: 

1. Debenture Trustee: The debenture trustee safeguards the interests of NCD holders and ensures that the issuer complies with agreed terms and conditions. 
2. Credit Rating Agencies: Credit rating agencies assess the creditworthiness of the NCD issue. The assigned credit rating reflects the issuer’s ability to meet its financial obligations. 
3. Registrars and Share Transfer Agents (RTAs): RTAs manage the issuance and transfer of NCDs in dematerialized form, ensuring efficient record-keeping and distribution. 

E-Book Providers: For larger NCD issues, e-book providers facilitate the electronic bidding process, enhancing efficiency in the allocation of NCDs. 

3. Transaction Documents

 Several important transaction documents are involved in the listing process: 

1. Offer Document: This document, also known as the prospectus, provides comprehensive information about the NCD issue. It includes details on the issuer, terms and conditions of the NCDs, risk factors, and financial statements. 
2. Debenture Trust Agreement: The debenture trust agreement outlines the terms and conditions between the issuer and the debenture trustee. It specifies the responsibilities and powers of the trustee to protect the interests of NCD holders. 
3. Debenture Trust Deed: This legal document, executed within two months from the allotment, is in accordance with the debentures rules. It further elaborates on the terms and conditions of the NCD issue. 
4. Credit Rating Letter: Credit rating agencies provide in-principle and final credit ratings for the NCD issue. These ratings are crucial in determining investor interest and confidence. 
5. Depository Agreement: This tripartite agreement between the company, RTA, and depository ensures smooth coordination in the issuance and maintenance of dematerialized NCDs. 

4. Listing Steps

The listing of NCDs involves several sequential steps: 

Step 1: Eligibility Criteria: Ensure that the NCD issue meets eligibility criteria, including credit ratings from at least one credit rating agency. 

Step 2: Application to BSE: Submit an application to the Bombay Stock Exchange (BSE) for the listing of NCDs. This application should include all necessary documents such as the prospectus and compliance certificates. 

Step 3: Approval from SEBI: The Securities and Exchange Board of India (SEBI) reviews the application to ensure compliance with regulations and investor protection. SEBI’s approval is crucial before proceeding with the listing. 

Step 4: Allotment and Issue: After receiving regulatory approval, the issuer allots NCDs to investors during the subscription period. Investors receive their NCDs in dematerialized form. 

Step 5: Listing Ceremony: The issuer conducts a listing ceremony, marking the debut of NCDs on the BSE. While this event is symbolic, it can generate market interest. 

Step 6: Trading Commencement: Once listed, NCDs can be bought and sold on the BSE’s secondary market, providing liquidity to investors. The BSE ensures a transparent trading platform for NCDs. 

 Step 7: Interest Payment and Redemption: Issuers are responsible for paying interest to NCD holders at regular intervals as specified in the prospectus. The principal amount is redeemed to investors upon maturity. 

Step 8: Compliance and Reporting: Issuers must adhere to regulatory reporting requirements, providing updates and disclosures as required by SEBI and BSE. 

By following these comprehensive steps, companies can successfully list their NCDs on the stock exchange, providing access to a broader pool of investors and enhancing the overall appeal of their debt offerings. 

Key things to be considered while Opting for NCD by the company: 

1. Companies planning to list their NCDs should keep in mind that NCD listing involves significant compliance costs, including payments to various intermediaries such as investment bankers and legal advisors.
2. The issuer must determine the exact amount of funds required for raising. 
3. The issuer should also verify whether the company’s articles permit the issuance of corporate guarantees and contain clauses related to the appointment of a debenture trustee. 
4. All the conditional precedents as per the debenture trust deed must be complied with.
5. Filing various forms with the ROC (Registrar of Companies) must be done in a timely manner. 
6. The issuer should also evaluate the cost of raising equity and debt. 
7. Companies should also consider the tax implications associated with NCDs, including interest income, capital gains, and any applicable withholding taxes. Understanding the tax treatment of NCDs is crucial for both the issuer and the investors. 

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