India: Banking & Finance

NBFCs raising money through private placement of NCDs

The RBI vide its circular dated February 20, 2015, has issued revised guidelines in relation to issue of non-convertible debentures ("NCDs") by the non-banking finance companies ("NBFCs") on private placement basis. In terms of the revised guidelines, any issue of NCDs by NBFCs on private placement shall inter-alia be governed by the following instructions:

  • The minimum subscription per investor shall be INR 20,000;
  • The issuance of private placement of NCDs shall be in two separate categories, those with a maximum subscription of less than INR 10 million and those with a minimum subscription of INR 10 million and above per investor;
  • There shall be a limit of 200 subscribers for every financial year, for issuance of NCDs with a maximum subscription of less than INR 10 million, and such subscription shall be fully secured;
  • There shall be no limit on the number of subscribers in respect of issuances with a minimum subscription of INR 10 million and above; the option to create security in favour of subscribers will be with the issuers. Such unsecured debentures shall not be treated as public deposits as defined in NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998, etc.

Securitisation Company (SC) / Reconstruction Company (RC) – Change in Shareholding

The RBI vide its circular dated February 24, 2015, has mentioned that the prior approval of the RBI shall be required only in case of the following changes in the shareholding of SC / RC:

  • any transfer of shares by which the transferee becomes a sponsor.
  • any transfer of shares by which the transferor ceases to be a sponsor.
  • an aggregate transfer of ten percent or more of the total paid up share capital of the SC / RC by a sponsor during the period of five years commencing from the date of certificate of registration.

NBFCs – Lending against Shares

The RBI has issued a circular dated August 21, 2014, pursuant to which, the RBI has laid down a minimum set of guidelines in relation to lending by NBFCs against shares. The RBI vide its circular dated April 10, 2015, has further clarified that:

(i) The above mentioned circular is not applicable to unlisted shares.
(ii) LTV ratio of 50% is required to be maintained at all times. Any shortfall in the maintenance of the 50% LTV occurring on account of movement in the share prices shall be made good within 7 working days.
(iii) The condition of acceptance of only Group 1 securities (specified in SMD/ Policy/ Cir - 9/ 2003 dated March 11, 2003 as amended from time to time, issued by SEBI) as collateral for loans of value more than INR 0.5 million, is applicable only where the lending is done for investment in the capital market.
(iv) The reporting to the Stock Exchanges shall be quarterly.

Mechanism for identification of wilful defaulters

The RBI vide its circular dated April 23, 2015, has amended the paragraph 3 of the Master Circular on Wilful Defaulters dated January 7, 2015. In terms of the amended paragraph 3, the RBI has laid down the guidelines / procedure for declaring the borrowing company and its promoter / whole-time director as wilful defaulters. It is further mentioned in the aforesaid circular by the RBI that except in very rare cases, a non-whole time director should not be considered as a wilful defaulters unless it is conclusively established that such non-whole time director was aware of the fact of wilful default by the borrower or such wilful default had been taken place with the consent or connivance.

Private Banks – Guidelines on compensation of Non-executive Directors

The RBI vide its circular dated June 1, 2015, has advised private banks to formulate and adopt a comprehensive compensation policy for the non-executive directors (other than part time non-executive chairman) in consultation with its remuneration committee. Such compensation, however, shall not exceed INR 1 million per annum for each director.

Strategic Debt Restructuring Scheme

The RBI vide its circular dated June 8, 2015, has issued new norms for strategic debt restructuring ("SDR") which gives lenders the right to convert their outstanding loans into a majority equity stake if they feel that a change in ownership can help turn around the borrower's business. The decision on invoking the SDR by converting the whole or part of the loan into equity shares should be well documented and approved by the majority of the JLF members (minimum of 75% of creditors by value and 60% of creditors by number). Further, the shareholding of respective lending bank will be subject to statutory ceiling limit as prescribed under Section 19(2) of the Banking Regulation Act, 1949.

The equity conversion clause needs to be incorporated at the time of restructuring, and the conversion of debt into equity should be at a conversion price (fair value) as calculated in accordance with the norms laid down by the RBI.

The aforesaid pricing formula has also been exempted under the Securities Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 subject to some conditions. Further, in case of listed company, the acquiring lender has also been exempted from an obligation to make an open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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