Presents The Power of 30!

A web series of 30 episodes covering different areas of corporate, securities and financial laws for the corporate professionals
across the country.
 DEBENTURES & DEPOSITS
– AN OVERVIEW

MUNMI PHUKON
Vinod Kothari & Company
Kolkata New Delhi Mumbai

1006-1009 Krishna Building A/11, Hauz Khas, 403-406,

224 AJC Bose Road New Delhi 110016 175 , Shreyas Chambers,
Kolkata – 700017 Phone:011-41315340/ D.N. Road, Fort,
Phone:033-22811276/ 22813742/7715 65515340 Mumbai – 400 001
E: corplaw@vinodkothari.com E: delhi@vinodkothari.com Phone: 022 22614021/ 62370959
E: bombay@vinodkothari.com
www.vinodkothari.com
Email: info@vinodkothari.com / vinod@vinodkothari.com
DEBENTURES
3
 WHAT IS A DEBENTURE?

 One of the most significant financial market instruments used for fund raising by the
corporates
Entitles the holders a fixed rate of return in the form of interest except for zero
coupon bonds
Freely transferable
Does not carry voting rights in general meeting
Section 2(30) of the Act, 2013 defines debenture to include debenture stock, bonds
or any other instrument of a company evidencing a debt, whether constituting a
charge on the assets of the company or not except money market instruments
referred to Chapter III of RBI Act or other instruments as may be prescribed by the
Ministry
 DEBENTURES NOT REGARDED AS DEPOSITS
Debentures secured by a first charge or a charge ranking pari passu with the first
charge on any assets referred to in Schedule III of the Act, 2013 excluding
intangible assets;

Debentures compulsory convertible into shares of the company within 10 years;

Non- convertible debentures not constituting a charge on the assets of the

company and listed on a recognized stock exchange;

Optionally convertible debentures, if issued to a company.

 CLASSIFICATION OF DEBENTURES
Transferability Freely transferable

Non transferable

Tenure Short term Compulsorily

Convertible

Long term Optionally

Convertible

Convertible Contingently
Types of Debentures – Debentures Convertible
Convertibility
based on

Non Convertible
Redeemable
Debentures

Perpetual
Secured Debentures
Security

Unsecured
Debentures

Public Participation Publically issued Listed

Debentures

Listed
Privately placed
Debentures Unlisted 6
 REQUIREMENTS OF SECTION 71 (1/2)
 Issuance of partly or fully convertible debentures requires a special resolution
 Creation of Debenture Redemption Reserve out of profits
 DRR shall be utilised for redemption of debentures
 Secured debentures to be redeemed within 10 years from date of issue
Companies engaged in setting up infrastructure projects, infrastructure finance companies,
infrastructure debt fund NBFCs and companies permitted by the CG, RBI or any other statutory
authority may issue for a period exceeding 10 years but not exceeding 30 years.
Appointment of Debenture Trustees is a prerequisite in case of -
secured debentures
Public issue (However, in terms of Rule 18(6) of SHA Rules, appointment of DT is not required)
Issue to members exceeding 500
Rule 18(3) the SHA Rules, 2014 lays down the duties of DT

7
 REQUIREMENTS OF SECTION 71 (2/2)
Liability of DTs shall be subject to such exemptions as may be agreed upon by debenture holders holding
atleast 3/4th in value of the total debentures at a meeting held for the purpose.
Where at any time the DT concludes that assets are insufficient to discharge the principal amount as and when
due, the DT shall file a petition before the Tribunal
For default in complying with the order of Tribunal, every officer in default shall be liable for imprisonment
for 1 – 3 yrs. / fine of Rs. 2 lakhs – Rs. 5 lakhs / with both
Contract with company to take up and pay for debentures may be enforced by a decree for specific
performance

8
 APPOINTMENT OF DEBENTURE TRUSTEES (DT) –
RULE 18(3) THE COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2 014

Eligibility criteria for appointment of (DT) made stricter, DT should not:

 beneficially hold shares in the company.
 be a promoter, director or KMP or any other officer or employee of the company or its holding,
subsidiary or associate company.
 be beneficially entitled to moneys paid by the Company ( apart from remuneration)
 be indebted to the company, or its subsidiary, or its holding or associate company or sister concern
 have furnished any guarantee in respect of the principal debts secured by the debentures or interest
 have any pecuniary relationship with the Company during the two immediately preceding financial
years or during the current financial year
 amounting to 2% or more of its gross turnover or total income or
 Fifty lakh rupees or higher prescribed amount, whichever is lower
 Should not be a relative of any promoter or any person who is in the employment of the company as a
director or KMP

9
 QUANTUM OF DRR TO BE MAINTAINED –
RULE 18 (7) THE COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014
Company shall create DRR equivalent to 25% of the outstanding amount
No DRR for private placement of debentures made by NBFCs, HFCs

Company to park, on or before 30th day of April each year, a sum of at least 15% of the amount of its debentures,
maturing during the year ending on the 31st day of March next following, in any one or more of the following
methods:
 in deposits with any scheduled bank, free from charge or lien;
 in unencumbered securities of the Central Government or of any State Government;
 in unencumbered securities mentioned in clauses (a) to (d) & (ee) of Section 20 of the Indian Trusts Act, 1882;
 in unencumbered bonds issued by any other company which is notified under clause (f) of Section 20 of the Indian
Trusts Act, 1882;
The money so parked can be utilized only for the purpose of redemption of debentures.
The amount remaining deposited /invested shall not at any time fall below 15% of the amount of debentures maturing
during that year ending 31st March
In case of partly convertible debentures, DRR to be created for non-convertible portion.

10
 OBLIGATION OF COMPANY FOR PAYMENT OF INTEREST/ REDEMPTION
AS PER TERMS
As per Section 71 (8), a company shall pay interest and redeem the debentures
 in accordance with the terms and conditions of issue
In case a company fails to pay interest or redeem debentures as per terms specified:
No specific penalty is provided under Section 71
In that case, general penalty section – Section 450- will become applicable.
Company and every officer who is in default or such other person
 Fine which may extend to 10,000 rupees
 In case of continuing contravention – further fine which may extend to 1000 rupees
for every day after the first during which contravention continues.

11
 OBLIGATION OF COMPANY FOR PAYMENT OF INTEREST/
REDEMPTION AS PER TERMS
Is interest and redemption of
Yes
debentures in accordance with
Section 71(8) is complied
terms and conditions of their
issue?

No

Violation of Section 71(8)

General penalty – as per No Debenture Trustee /any Yes

section 450 of Companies Debenture Holder filed NCLT will pass order
Act, 2013 petition to NCLT?

On Company and every

officer who is in default or No Yes
every officer in default – imprisonment upto 3 Redemption of
such other person Order of NCLT
years or fine of atleast two lakhs but upto five debentures with
complied ?
lakhs or both interest

12
ISSUE OF DEBENTURES BY NBFCS
13
 PROVISIONS OF ACT, 2013 – INAPPLICABLE TO NBFCS

Private placement Sec. 42 14(5) Provisions of rule pertaining to private placement

of securities [Companies (Prospectus and of securities that can be made by a Company to
Allotment of Securities) maximum 200 persons in the aggregate in a FY
Rules, 2014] are not applicable.

Companies Sec. 73 3(ii) Rules prescribed for acceptance of deposit from

(Acceptance of & 76 [Companies (Acceptance of members and other persons are not applicable.
Deposit) Rules, Deposit) Rules, 2014]
2014

Debenture Sec. 18(7)(b) No DRR is to be maintained in case of privately

Redemption 71(4) [Companies(Share Capital placed debentures.
Reserve and Debenture) Rules,
2014] 14
 ISSUE OF DEBENTURES BY NBFCS BY PRIVATE PLACEMENT-
REGULATIONS APPLICABLE
 Section 42 of Act, 2013
 In absence of a proviso similar to Sec 67(3) of Act, 1956
 Section 71 of Act, 2013
 Provisions relating to security, DRR, payment of interest, petition to NCLT etc.
 SEBI (Issue and Listing of Debt Securities) Regulations, 2008
 In case the issue is to be listed on SE
 Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010
 In case of issue of short term debentures issued by way of private placement
 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
 In case of issue on convertible debentures on preferential basis by listed NBFCs
 RBI Guidelines on Private Placement
 In case of issue of long term debentures issued by way of private placement by NBFCs.

15
 RBI GUIDELINES ON PRIVATE PLACEMENT OF DEBENTURES

RBI issued vide Notification on February 20, 2015

 the Guidelines on Private Placement of NCDs (maturity more than 1 year) by NBFCs
 in supersession of Guidelines issued on 27th June, 2013 and clarification issued on 2nd July,
2013
 Not applicable to tax exempt bonds offered by NBFC
NBFCs to formulate a Board approved policy for resource planning, covering the planning
perspective and periodicity of private placement
RBI has stipulated the guidelines majorly for issuance of private placement of NCDs of 2
categories:
 With a maximum subscription of less than Rs. 1 crore (Category A)
 With a minimum subscription of Rs. 1 crore and above (Category B)

16
 QUICK COMPARISON OF CATEGORY A & B

Category A Category B

Maximum subscription shall be Minimum subscription of 1 cr.

below 1 cr. per investor or more per investor

Minimum subscription shall be --

20K per investor

Maximum number investor

shall be 200 in a Financial No such limit
Year

Subscription shall be fully Creation of security is

secured optional
17
DEPOSITS
MEANING OF DEPOSITS UNDER CA, 13
19
 AN INCLUSIVE DEFINITION-
RULE 2 OF DEPOSITS RULES, 2014
Includes-
 any receipt of money
 by way of deposit or loan or in any other form, by a company
Hence, it will include-
 Deposit in substance
 Amount received from LLP
 Installment schemes- Deemed Deposit
 If a scheme promises returns, in cash or in kind, at the end of the specified period, the
scheme may be treated as a “deposit”
What all are not deposits are covered in upcoming slides.

20
 WHAT IS NOT A DEPOSIT? – 1/2

Amount received from CG/ SG or other authority guaranteed by  Amount received and held in trust.
CG/SG ▫ Provided no interest is paid

Loans from Banks, Financial institutions  Advance received for supply of goods/ services
▫ Provided appropriation of such advance within
Money received from Company 365 days
Amount issued as CCD  Deposit from directors subject to a declaration
 Provided it is mandatorily converted in shares in 10 years • relative of director in case of private company
also included
Amount issued as Secured debentures  Amount received from employee
 Provided it is 100% secured ▫ Not exceeding his annual salary
Amount received towards subscription of any securities  Amounts received from AIFs, Domestic VCFs, IITs and
 Allotment to be made within 60 days from the date of receipt of Mutual Funds
money or advance.
 amount not refunded within 15 days from completion of 60 days
will be treated as deposits.
 Any adjustment will not be treated as refund. 21
 WHAT IS NOT A DEPOSIT? – 2/2

Amount raised through issuance of Commercial paper

Any other instruments issued as per RBI guidelines/ notification
 Short term NCDS issued with 12 months maturity and by private placement will get exempted.

Promoter’s unsecured funding

 On stipulation imposed by lending institution

Any other transaction not amounting to deposit in substance

Collective Investment Scheme
Security Deposit
Deposit from foreign corporate, citizens.
Convertible note issued by Start-up
 Of 25 lakhs or more
 Either convertible into equity or repayable within 5 years 22
PROHIBITIONS, ALLOWANCES &
REQUIREMENTS
23
 PROHIBITION ON ACCEPTANCE OF DEPOSITS FROM PUBLIC (SEC 73)

Combined reading of sub sections (1) and (2) gives an impression that this section relates to
acceptance of deposits from members only
For acceptance of deposits from members, the followings have been prescribed:
 Deposit Circular to be registered with the Registrar
 Maintenance of deposit repayment reserve account
 Atleast 20% of amount of deposits maturing during following FY
 Deposit on or before 30th April every year
 Rate of interest should not exceed the maximum rate as prescribed by RBI
Section 73 states that sub-section (1) shall not be applicable to:
 Banking company
 NBFC as defined in RBI Act, 1934

24
 PUBLIC DEPOSITS ONLY BY ELIGIBLE COMPANIES (SEC. 76)

Eligible
Companies

Public Companies

Net worth of not less Has taken prior

Or Turnover of not less than And approval by SR and
than Rs. 100 crore Rs. 500 crore filed with the Registrar

 Other requirements:
 Obtaining of credit rating from recognized CRAs on yearly basis
 Creation of security of an amount equivalent to deposit accepted

25
 PENAL PROVISIONS

• In case of contravention with section 73 or 76, section 76A imposes enormous penalty
 On the company
• Fine of not less than 1 cr. which may extend to 10 cr.
 On the officer who is in default
 Imprisonment which may extend to 7 years AND
• Fine of not be less than 25 lakhs which may extend to 2 cr.
• Making it non -compoundable

26
DEPOSITS RULES, 2014
27
 RESTRICTIONS- RULE 3

 Rule 3 lays down certain restrictions on acceptance of deposits by

companies-
 Companies shall not accept / renew deposits repayable on demand or upon receiving a
notice within a period of less than 6 months or more than 36 months from the date of
acceptance / renewal.
 The company may accept / renew deposits for less than 6 months, if
 Such deposits do not exceed 10% of aggregate share capital, free reserves and
securities premium account
 Minimum tenure of be 3 months.

28
 LIMIT ON ACCEPTANCE OF DEPOSITS- RULE 3 (3, 4 & 5)]

Deposits from members by other than eligible companies-

 Allowed upto 35% of paid-up share capital + free reserves along with outstanding deposits from members

By eligible companies

Deposits from members upto 10% of paid-up share capital + free reserves along with outstanding deposits
form members.
Any other deposit, upto 25% of paid-up share capital + free reserves + securities premium account along
with outstanding deposits (other than deposits from members).

Eligible company being a Government Company-

upto 35% of paid-up share capital + free reserves.

29
 RATE OF INTEREST OR BROKERAGE- RULE 3(6)

The rate of interest paid on deposits shall not exceed the maximum rate
prescribed by RBI for acceptance of deposits by NBFCs.
Similar is provision for payment of brokerages.
Provided that only persons authorized by companies to solicit deposits on its
behalf shall be entitled to brokerages.

30
 VALIDITY OF CIRCULAR – RULE 4(6)

A circular or circular in the form of advertisement issued in accordance with sub-

section (2) of section 73 or section 76 shall be valid until the earlier of-
 The date of expiry of 6 months from closure of financial year in which issued or
 Date on which financial statements laid before company in general meeting or latest day on which the
meeting should have been held as per the Act

31
 CREATION OF SECURITY- RULE 6

Company u/s 73(2) and every Eligible company inviting secured deposits shall
provide for security
By way of charge on assets referred to in balance sheet, excluding intangible assets.
The amount of such deposits and interest payable thereon shall not exceed the market value of such assets
as assessed by a registered valuer.

Security to be created in favor of a deposit trustee

on a specific moveable property or
On specific immoveable property of the company or interest thereon.

32
 APPOINTMENT OF DEPOSIT TRUSTEES- RULE 7

Company needs to appoint deposit trustees before inviting secured deposits.

Written consent to be obtained from trustees
Deposit trust deed to be executed atleast 7 days before issuing circular/ advertisement.

A person, including a company providing trusteeship services, cannot be

appointed as trustee if such person
Is a director, KMP, officer or employee of the company, or of its holding, subsidiary or associate
company or a depositor in the company or is related to any such person ;
Is indebted to the company, or its subsidiary, holding or associate company or a subsidiary of such
holding company.
Has any material pecuniary relation with the company;
Has entered into any guarantee arrangement in respect of principal debts secured by the deposits or
interests thereon.

33
 CREATION OF DEPOSIT REPAYMENT RESERVE- RULE 13
Applicable to every company raising member deposits & eligible companies.
Company to park,
on or before 30th day of April each year,
a sum of at least 25% of the amount of deposits, whether secured or unsecured, maturing during the
following financial year
in deposit repayment reserve account with any scheduled bank, free from charge or lien;

The money so parked can be utilized only for the purpose of repayment of deposits

34
 PREMATURE REPAYMENT OF DEPOSITS – RULE 15

In case of repayment of deposit, on the request of depositor, after a period

of 6 months from date of deposit but before expiry of deposit period
Rate of interest paid will be
rate which the company would have paid had the deposit been accepted for the period
for which such deposit had actually run - 1%
the company shall not pay interest at any rate higher than the rate so reduced.

35
 FAILURE OF SCHEDULED REPAYMENT OF DEPOSITS SEC 73(4)

Depositors to do-

• Sum due ;
To For To
Depositor NCLT directing • Loss or
approach order pay damage
incurred

36
PENAL PROVISIONS FOR FRAUD- SEC 75

Penal provisions for fraud-

Company fails Defrauding Liability under

to repay proved section 447

37
DEPOSITS BY NBFCS
38
 DEFINITION OF DEPOSIT AND PUBLIC DEPOSIT
Deposit as per section 45-I(bb) of the RBI Act, 1934
 Any amount of money excluding the following–
 raised by way of share capital
 contributed as capital by partners of the firm
 received from a scheduled bank or a co-operative bank or any other banking company
defined under Banking Regulations, 1949
 received from SFC or any other financial institution under IDBI or any other prescribed
institution
 received in the ordinary course of business as
 security deposit, dealership deposit, earnest money, advance against orders for goods
 received from firm or an AOP not being a body corporate and registered under
enactment related to money lending
 received by way of subscriptions in respect of a chit.
• Public deposit – Deposit as per the RBI Act, 1934 except certain items mentioned in the
next slide
39
 EXCEPTIONS TO PUBLIC DEPOSIT UNDER RBI DIRECTIONS(1/4)

amount received from CG, SG, local authority, foreign government or citizen

any amount received from IDBI or LIC or GIC and its subsidiaries SIDBI or UTI or NABARD or Electricity Board and
such Government companies that are notified by RBI.

any amount received as hybrid debt or subordinated debt :-

- Minimum maturity period is not less than 60 months
- Provided there is no option for recall by the issuer within the period;

40
 EXCEPTIONS TO PUBLIC DEPOSIT UNDER RBI DIRECTIONS(2/4)

any amount received by a company from another company

any amount raised by issuance of NCD in accordance with RBI guidelines:-

- Maturity period should be more than one year
- Minimum subscription per investor is Rs.1 crore and above

unsecured loan brought in by the promoters subject to the-

- loan brought in pursuance of the stipulation imposed by the lending PFI in fulfilment of the obligation of the promoters to
contribute such finance,
- loan is provided by the promoters themselves and/or by their relatives, and not from their friends and business associates,
and
- exemption under this sub-clause shall be available only till the loan of financial institution is repaid and not thereafter;

41
 EXCEPTIONS TO PUBLIC DEPOSIT UNDER RBI DIRECTIONS(3/4)

any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable
property of the company or any other asset-
- the amount of such bonds or debentures shall not exceed the market value of such immovable
property/other assets

any amount received by a NBFC-SI-ND by issuance of 'perpetual debt instruments' in accordance with RBI
Guidelines.

any amount raised by the issue of infrastructure bonds by an IFC as specified by CG u/s 80CCF of the IT Act.

42
 EXCEPTIONS TO PUBLIC DEPOSIT UNDER RBI DIRECTIONS(4/4)

amount received and held in accordance with the provisions of the CA, 2013 towards subscription of
securities, including share application money
- pending allotment for not more than 60 days

amount received from a director of a company or a shareholder of a private company

- provided amount should not be borrowed funds and a declaration to that effect is to be given

any amount received by MFs regulated by SEBI and issuance of commercial paper in accordance with
guidelines.

43
 INSTRUMENTS OF FUNDING FOR FINANCIAL ENTITIES-
NOT TREATED AS DEPOSITS
1. Secured Bonds/ Debentures

2. CCBs/CCDs

3. NCDs having minimum subscription of Rs. 1 crore and minimum maturity of 1 year

4. Hybrid Debt Instruments

5. Subordinated Debt Instruments

6. Commercial Paper

7. Infrastructure Bonds

8. Perpetual Debt Instruments

44