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Corporate Bonds and Debentures FCS Vinita Nair Vinod Kothari Company Kolkata: New Delhi: Mumbai: 1006-1009, Krishna A-467, First Floor, 403-406, Shreyas Chambers 224 AJC Bose Road Defence Colony, 175, D N Road, Fort Kolkata – 700 017 New Delhi-110024 Mumbai Phone: 033 2281 3742/7715 Phone: 011 41315340 Phone: 022 2261 4021/ 6237 0959 Email: [email protected] Email: [email protected] Email: [email protected] Website: www.vinodkothari.com 1 Copyright & Disclaimer . This presentation is only for academic purposes; this is not intended to be a professional advice or opinion. Anyone relying on this does so at one’s own discretion. Please do consult your professional consultant for any matter covered by this presentation. The contents of the presentation are intended solely for the use of the client to whom the same is marked by us. No circulation, publication, or unauthorised use of the presentation in any form is allowed, except with our prior written permission. No part of this presentation is intended to be solicitation of professional assignment. 2 About Us Vinod Kothari and Company, company secretaries, is a firm with over 30 years of vintage Based out of Kolkata, New Delhi & Mumbai We are a team of qualified company secretaries, chartered accountants, lawyers and managers. Our Organization’s Credo: Focus on capabilities; opportunities follow 3 Law & Practice relating to Corporate Bonds & Debentures 4 The book can be ordered by clicking here Outline . Introduction to Debentures . State of Indian Bond Market . Comparison of debentures with other forms of borrowings/securities . Types of Debentures . Modes of Issuance & Regulatory Framework . Private placement v/s public issue . Recent amendments . Continual Compliances under SEBI Regulations and Circulars 5 Introduction to Debentures 6 Definition . Companies Act, 1956 defined “debenture” as – . SEBI (ILDS) Regulations, 2008 ▫ “debenture” "debenture" includes debenture stock, ▫ “debt securities” means non-convertible debt bonds and any other securities of a company, whether securities which create or acknowledge indebtedness constituting a charge on the assets of the company or and includes debentures, bonds and such other not. securities of a body corporate or a Trust registered with the Board as a Real Estate Investment Trust or an . Companies Act, 2013 defines “debenture” as- Infrastructure Investment Trust, or any statutory body ▫ "Debenture" includes debenture stock, bonds or any constituted by virtue of a legislation, whether other instrument of a company evidencing a debt, constituting a charge on the assets of the body whether constituting a charge on the assets of the corporate or not, but excludes bonds issued by company or not; Government or such other bodies as may be specified by ▫ Provided that— the Board, security receipts and securitized debt • the instruments referred to in Chapter III-D of the instruments; Reserve Bank of India Act, 1934; and • such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture. 7 State of Indian Bond Market 8 Private Placement of Debentures 800000 700000 600000 ) 500000 400000 Crores . Amount Rs ( 300000 200000 100000 0 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Issue Size 218785.41 261282.65 361462 276054.18 404136.5 458073.48 640715.51 599147.08 610317.61 674702.88 631825 Financial Year Source: SEBI last visited on 22-02-2021 9 Split between listed on BSE, NSE and Both 300000.00 250000.00 200000.00 Crores 150000.00 Amount in Amount 100000.00 50000.00 0.00 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 NSE 153370.26 189803.32 206187.25 140713.04 169726.02 206676.33 219720.60 170834.70 177592.70 203066.26 168278.00 BSE 52590.53 56974.22 72473.84 78805.14 117949.38 152281.15 254212.71 23461.68 247450.89 254976.40 223618.00 Both 12824.63 261282.65 82800.91 56536 116461.1 99116 166782.2 193697.7 185274.02 216660.39 239929 Financial Year Source: SEBI last visited on 22-02-2021 10 NSE BSE Both Public Issue of Debentures 45000 42382.97 40000 36679.36 35610.71 35000 33811.92 29547.15 30000 Crores 25000 20000 16982.05 14984.02 Amount In Amount 15000 9451.17 9713.43 10000 9118.65 4953.05 5000 0 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Issue Size 9451.17 35610.71 16982.05 42382.97 9713.43 33811.92 29547.15 4953.05 36679.36 14984.02 9118.65 Financial Year Source: SEBI last visited on 22-02-2021 11 Outstanding corporate bonds 3500000.00 ) 3000000.00 crore 2500000.00 . in . Rs 2000000.00 1500000.00 1000000.00 Net outstandingNetamount ( 500000.00 0.00 2017- 2017- 2018- 2018- 2018-19 2018-19 2019-20 2019-20 2019-20 2019- 2020-21 18(Q3) 18(Q4) 19(Q1) 19(Q2) (Q3) (Q4) (Q1) (Q2) (Q3) 20(Q4) (Q4) Outstanding Instruments 2647034.00 2742259.07 2837683.00 2838211.33 2948165.00 3067228.19 3063397.28 3087798.84 3144306.31 3253921.59 3322506.75 Financial Year 12 Source: SEBI last visited on 22-02-2021 Issuers in Bond market Issuers in Corporate Bond Market Banks and Financial Public Sector Units Corporates Local Bodies Institutions (PSUs) 13 Large Corporate Borrower (LCB) framework SEBI circular Nov 26, 2018 . Eligibility criteria for classification as LCB: No. of LCB for 2019-20 159 ▫ Listed specified securities or debt securities or NCRPS; and No. LCB that met the target 94 ▫ Outstanding long term borrowing of more than INR 100 crores; and during 2019-20 ▫ Borrowing with original maturity of more than 1 year, Amount raised 4.59 ▫ excluding ECBs and inter-corporate borrowings between parent and subsidiary(ies) lakh crore ▫ Minimum credit rating of AA for unsupported bank borrowing or plain vanilla bonds. Balance to meet shortfall during 65 ▫ Facility with no structuring/ support built in. 2020-21 ▫ In case of multiple rating agencies, highest of the rating to be considered. Minimum 25% of incremental borrowing to be met by issuance of debt securities. "incremental borrowings" shall mean any borrowing done during a particular financial year, of original maturity of more than 1 year, irrespective of whether such borrowing is for refinancing/repayment of existing debt or otherwise and shall exclude ECB and inter-corporate borrowings between a parent and subsidiary(ies). Effective from April 1, 2019. ▫ During FY 2020 and FY 2021 – explanation for shortfall to be given, in case unable. ▫ From FY 2022 onwards mandatory requirement to be met over a continuous block of two years. 14 ▫ a listed entity identified as a LC, as on last day of FY "T-1", shall have to fulfil the requirement of incremental borrowing for FY "T", over FY "T" and "T+1“ ▫ In case of shortfall, monetary penalty/fine of 0.2% of the shortfall in the borrowed amount shall be levied and the same shall be paid to the Stock Exchange(s). Investors in Bond Market Share of different classes of Investors in Corporate Bonds [FY 2018] Others (Corporates, high net-worth Mutual Funds individual etc.) 20% 10% Banks 17% Insurance Companies 22% Foreign Portfolio Investors 10% Employee Provident Fund Organisation National Pension 13% Scheme Exempted trusts 2% 6% Source: CRISIL Year Book 15 Debentures v/s Bonds . Section 2(10A) of the Indian Stamp Act, 1899 defines . Section 2(5) of the Indian Stamp Act, 1899 defines “debentures” as – “bonds” as - ▫ "debenture" includes— ▫ “Bond” includes— • Debenture stock, bonds or any other • any instrument whereby a person obliges himself to instrument of a company evidencing a debt, pay money to another, on condition that the whether constituting a charge on the assets of obligation shall be void if a specified act is the company or not; performed, or is not performed, as the case may be; • bonds in the nature of debenture issued by • any instrument attested by a witness and not any incorporated company or body corporate; payable to order or bearer, whereby a person obliges • certificate of deposit, commercial usance bill, himself to pay money to another; and commercial paper and such other debt • any instrument so attested, whereby a person instrument of original or initial maturity upto obliges himself to deliver grain or other agricultural one year as the Reserve Bank of India may produce to another: specify from time to time; • securitised debt instruments; and but does not include a debenture; • any other debt instruments specified by the Securities and Exchange Board of India from time to time. 16 Comparison with other forms of borrowing/ securities . Debenture v/s Commercial Paper . Debenture v/s Preference Shares ▫ Nature ▫ Nature ▫ Issuance ▫ Issuance ▫ Listing ▫ Listing ▫ Coupon ▫ Return ▫ Creation of security interest ▫ Creation of security interest ▫ Tenure ▫ Redemption ▫ Early redemption (call/ put). Debenture v/s Loans . Debenture v/s PTCs ▫ Nature ▫ Nature ▫ Issuance ▫ Nature of investment ▫ Listing ▫ Listing ▫ Transferability ▫ Creation of security interest ▫ Creation of security interest 17 Applicability of provisions of CA, 2013 in case of loans availed v/s debentures issued Section Section Heading Dealing with 44 Nature of share and debenture Debentures shall be movable property. 52 Application of premium received on issue of Manner in which the securities premium account can be applied. shares 62(3) Further issue of share capital Increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised. 62(4) Further issue of share capital Power with the government to direct conversion into shares, even if the terms are silent on the conversion option.
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