On 29 June 2016 the Ministry of Corporate Affairs notified the
Companies (Acceptance of Deposits) Amendment Rules, 2016
(Amendment) amending the Companies (Acceptance of Deposits) Rules,
2014 (Deposit Rules). The Deposit Rules principally define the
treatment of certain borrowings as public "deposits"
thereby attracting stricter norms. The Deposit Rules provide
certain important exceptions to public "deposits" thereby
allowing issuers to raise loans and issue non-convertible
securities in the ordinary course of business without complying
with the strict requirements of the Deposit Rules. The Amendment
makes key changes to the exceptions from "deposit" which
are likely to have a significant impact on the Indian bond market.
We discuss these below.
Under the erstwhile Deposit Rules, bonds and debentures which
complied with any of the following criteria were not considered to
be public "deposits":
The bonds or debentures were secured
by a first charge or a charge ranking pari passu with the first
charge on certain assets of the issuer excluding intangible assets,
provided that the bonds provided for at least 1x security cover as
against the market value of the charged assets;
The bonds were compulsorily
convertible into equity within five years;
The subscribers to the bonds were
persons resident outside India; or
The bonds were in the nature of
amounts received by the issuer company from any other company.
However, the Deposit Rules left unsaid the treatment of
unsecured debentures in the hands of subscribers who did not meet
any of the requirement of (c) and (d) above, for example mutual
funds and alternative investment funds.
The Amendment has added the following additional exceptions to
"(ixa) any amount raised by issue of non-convertible
debenture not constituting a charge on the assets of the company
and listed on a recognised stock exchange as per applicable
regulations made by Securities and Exchange Board of
"(xviii) any amount received by a company from
Alternate Investment Funds, Domestic Venture Capital Funds and
Mutual Funds registered with the Securities and Exchange Board of
India in accordance with regulations made by it."
This Amendment provides an important regulatory clarification
which has opened the doors for unsecured fund raising through the
bond market route in a major way. This Amendment will assist
borrowers with highly leveraged balance sheets and lacking adequate
collateral to provide security for bank loans to raise financing
through the capital markets route. This also aligns the Companies
Act 2013 framework with the Non-banking Financial Companies (NBFCs)
deposit rules framework which had allowed mutual funds to invest in
non-convertible debentures (NCDs) issued by NBFCs. In addition,
this Amendment will be favourable to asset light companies such as
technology companies, start-ups, consumer companies, investment
companies, among others. Most importantly, the clarifications open
up many structuring options allowing for unsecured fund raising and
expand the list of eligible investors who can subscribe to
unsecured NCDs issued by Indian companies.
The content of this document do not necessarily reflect the
views/position of Khaitan & Co but remain solely those of the
author(s). For any further queries or follow up please contact
Khaitan & Co at firstname.lastname@example.org
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The committee set up to draft a Code on Resolution of Financial Firms, by the Ministry of Finance, Government of India, on September 28, 2016, released a draft bill – The Financial Resolution and Deposit Insurance Bill, 2016...
In a race to adopt technology innovations, Banks have increased their exposure to cyber incidents/ attacks thereby underlining the urgent need to put in place a robust cyber security and resilience framework.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).