What is Convertible and Non-Convertible Debentures?

Debentures are issued by corporates including NBFCs to raise resources for their upcoming expenses or their business expansions. In other words, debentures are unsecured loans taken by companies from the public (other than accepting deposits) by issuing instruments of debt, acknowledging money lent, and guaranteeing repayment with interest. The investors subscribe to debentures only based on the good name and credit history of the issuer company without the backing of any collateral.

Debentures are typically in two varieties.  The companies that issue debentures may give an option to investors convert the debentures on maturity into equity shares of the company either in full or in part. Depending upon convertibility, these debentures are classified as fully convertible debentures or partly convertible debentures. The Non – Convertible debentures (NCDs) do not have the option of conversion into shares and on maturity, the principal amount along with accumulated interest is paid to the debenture holder.

Issuance of debentures by a company involves compliance with procedural aspects of the law. The corporates who have a tangible net worth of Rs.4 crore or above as per the latest audited balance sheet (this condition is not applicable in the case of NBFC and PDs) are eligible to issue NCDs.  The company that desires to issue NCDs shall enjoy a working capital credit facility or term loan facility from banks or all Indian financial institutions and such credit facility enjoyed by the company is classified as a standard asset by the lender. Further, the company shall obtain a credit rating from one of the following six credit rating agencies Viz. Credit Analysis and Research Limited(CARE), CRISIL Limited, FITCH India, ICRA Limited, Brickwork Ratings India Pvt. Limited (Brickwork), SMERA, INFOMERICS Valuation and Rating Pvt Ltd. (INFOMERICS). The minimum credit rating shall be A-2 rating symbol prescribed by SEBI. The rating so obtained by the company shall be current and has not fallen due for review. The tenor of NCDs issued shall not exceed the validity period of the credit rating allotted to them. The aggregate amount of NCDs issued by a company shall be within the limit approved by the Board of Directors or the quantum fixed by the credit rating agency while granting the rating, whichever is lower.

On January 3, 2024, RBI REVISES NORMS FOR ISSUANCE OF NON-CONVERTIBLE DEBENTURES. To know the details click “changes”

The company that issues NCDs shall disclose its financial position to the prospective investors as per the Disclosure Document brought out by the Fixed  Income  Money  Market and  Derivatives  Association of  India  (FIMMDA). The Auditors of the company shall certify that all the conditions set forth by the regulatory authorities to issue NCDS are met by the company.

NCDs are issued at the face value either carrying a coupon rate or at a discount to face value as zero coupon instruments. The instruments are typically in a minimum denomination of Rs.5 lakh (face value) and multiples of Rs.1 lakh. As per regulatory norms, the tenor of the NCDs issued should not be less than 90 days from the date of issue. The exercise date attached for option (PUT/CALL) if any should not be within 90 days from the date of issue. Once the corporate opens the issue for subscription same shall be completed within 2 weeks.

Individuals (including NRIs), corporate bodies, insurance companies, mutual funds registered or incorporated in India, and unincorporated bodies are eligible to invest in NCDs issued by the corporates. The foreign institutional Investors (subject to permit under FEMA rules) are also allowed to invest in the NCDS. Banks and Primary Dealers are allowed to invest in NCDs subject to the approval of the RBI and the respective statutes governing them.

Debenture Trustee: Under section 71(5) of the company act, for issuance of debentures, it is mandatory to appoint a Debenture Trustee (DT) who is registered with SEBI under SEBI debenture Trustees regulations. DT can be a scheduled bank, an insurance company, a body corporate, or a financial institution. The DT addresses the grievances of debenture holders; safeguarding the interest of debenture holders by ensuring that the assets of the company are sufficient to discharge the principal amount. The DT reports to RBI all the information periodically required of it which includes the amount outstanding under NCDs issued by the company, and occurrences of default if any.