Issue 6 (dated 12 March 2014). Contact us at contact.investments@ifmr.co.

in

In our last newsletter, we discussed social performance outlining the concept and elaborating the various tools
in use for evaluating and benchmarking social performance. This month we present a step-by-step guide to
issuance of Non-Convertible Debenture (NCD) on a private placement basis.
Financing for the Indian micro finance institutions have traditionally been from the banks, as lending to the
sector enables the banks in meeting their priority sector targets. However, in the last few years the MFIs have
started to look at diversified source of instruments like NCDs, while the term loans and securitisations from
banks and other financial institutions still constitute 85% of total funding to the MFIs.
Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer. Some
debentures have a feature of convertibility into shares after a certain point of time at the discretion of the
owner. The debentures which cannot be converted into shares are called non-convertible debentures
(NCDs). An NCD is a debt instrument with a fixed tenure that pays a certain rate of interest monthly, quarterly,
annually or at the end of the tenure. NCDs can be issued by corporate entities (including NBFCs) where
corporate entity means a company as defined in the Companies Act, 1956 (including NBFCs).
In this newsletter we focus on the issuance procedure of NCDs on a Private Placement basis. Private NCD
placements require lesser documentation and compliance procedures but carry restrictions on number of
investors per issuance (not more than 49).
According to RBI, all NCDs including privately placed NCDs must be fully secured. Unsecured debentures with a
tenure upto 5 years and partially secured NCDs are considered as deposits attracting provisions relating to
acceptance of deposits by NBFCs. In case the security cover is inadequate / not created at the time of issue, the
issue proceeds must be kept in an escrow account until creation of security.
Unsecured NCDs can be structured as subordinated debt of 5 years and above (qualifying as Tier II) or perpetual
debt (qualifying as Tier I capital, respectively). As subordinated debt needs to be an instrument as defined
under RBI guidelines, subordinated debt is typically raised in the form of NCDs.
For private placement, minimum subscription amount for a single investor is Rs. 25 lakh and in multiples of
Rs.10 lakh thereafter.
The offer document should clearly mention "For Private Circulation Only". General information including the
address of the registered office of the NBFC, date of opening / closing of the issue etc. should be clearly
mentioned in the offer document.
Following are the steps for issuance of NCDs:

Issue Size

Tenure
Coupon
Coupon Payment
Frequency
Security
Board Resolution

Internal requirements for Investees Pre issue

One or more series if tenure or coupon varies. If the company is going to issue similar
debentures over the next six months it can consider filing a shelf prospectus (only
applicable for private placements)
Up to one year requires adherence to RBI guidelines including minimum rating of A2and
beyond one year may have put/call options.
Can be fixed or floating linked to a benchmark rate
Day count convention as per SEBI requirements
Typically quarterly, semi-annual or annual
Secured Receivables margin
Un-secured Only as capital issuance else considered as deposit
Issuance of NCDs (Physical meeting of Board)

Issue 6 (dated 12 March 2014). Contact us at contact.investments@ifmr.co.in

SEBI Registration
BSE/ NSE

ISIN

Term Sheet
Appointment of
arranger/law firm
Application Form

Trustee
appointment
agreement
Information
Memorandum (IM)

Appointment of Trustee
Obtaining a credit rating (to inform RBI post obtaining the rating)
Engagement of law firm for legal opinion
Appointment of RTA
Execution of tripartite agreement between company, RTA and Depository for
demat of NCDs
One-time registration for online complaint redressal system - SCORES
Obtaining in-principle approval for issuance. Listing is not mandatory for NBFCs if the
investor is domestic, but preferable. If the investor is an FPI/FII/QFI, then the listing
needs to be completed within 15 days of receipt of funds.
File Master File Creation form (MCF) and obtaining ISIN No. from NSDL and CDSL
Internal requirements for Investors Pre issue
Provides the basis of the NCD transaction including the key terms like amount, tenure,
interest rate etc.
Usually this is required by the investor to get an independent legal opinion on the
documentation.
To receive duly filled-in application form on pay-in date
Documentation requirements
This is a simple document providing clauses with regard to appointment of the Trustees
for this issuance of NCDs.

Also known as Debt Disclosure Document, this is required for compliance with SEBI
guidelines on disclosure and covers the profile of the issuer company in detail. The offer
document should clearly mention "For Private Circulation Only". General information
including the address of the registered office of the NBFC, date of opening / closing of
the issue etc. shall be clearly mentioned in the offer document.
Debenture Trust
This will have all the covenants financial, operational, events of defaults, power of
Deed (DTD)
trustees, conduct of meetings etc.
Deed/Memorandum This will contain the security clauses namely receivables margin, the charge creation,
of Hypothecation
type of charge, frequency of top-up etc.
Power of Attorney
POA provides for legal flexibility so the appointee can represent the issuer for collection
of receivables.
Listing Agreement
Standard document to be executed post the allotment and submitted to the stock
exchange on credit of debentures in demat account of investor
Tripartite
Standard document to be executed with both depositories along with Registrar and
Agreement
Transfer Agents (RTA) for creation of ISIN and for holding/transfer of debentures and the
depository namely NSDL &/or CDSL.
Rating Agreement
Standard document for initiating the rating process

Rating Agency
SEBI registered
Debenture Trustees
Stock Exchange
Depository
List of Registrar &
Transfer Agents
(RTA)

Interaction with Service Providers

CRISIL, ICRA, CARE, India Ratings (Fitch), Brickworks and SMERA
http://www.sebi.gov.in/sebiweb/home/detail/154/new/Registered-Debenture-Trustees
NSE or BSE
NSDL & CDSL
https://www.cdslindia.com/publication/rtalist.jsp
https://nsdl.co.in/related/regtrf.php
Preferable to use the same RTA if the shares of the company are dematerialised

Issue 6 (dated 12 March 2014). Contact us at contact.investments@ifmr.co.in

Stamp duty

Allotment
Corporate Action

Listing on stock
exchange

Payment of Stamp
duty & Creation of
security (Form 10)
Legal Opinion

Fixing of Record
Date
Quarterly
compliance
certificate on
covenants?
Half-yearly
compliance
certificate
Publication of
audited financials
on half-yearly basis
Rating change
Security
Monitoring of
online complaints

Debenture
redemption reserve
De-list on
repayment
Debit corporate
Action
Satisfaction of
charge

Preferred route for payment of stamp duty of 0.5% per year but not exceeding 0.25% is
through e-stamping with entities like Stockholding Corporation etc.

Internal requirements Post issue

It is important to freeze the allotment date upfront before filing for ISIN. Also, the
allotment can be done on the date of pay-in itself
Post allotment, the investee needs to initiate credit corporate action to create the units
and credit it to the demat account of the investor. It must obtain both ISIN allocation
letter and credit confirmation letter from the depository through the RTA.
The investee will have to ensure it is done within 15 days from date of issue (as per SEBI
guidelines for the foreign investors).
Post the corporate action, it is necessary to provide the details to the stock exchange
along with listing application and draft towards listing fees, compliance certificate, Board
Resolution, rating letter, consent letters from trustee, RTA etc. for listing the security.
Post scrutiny, the exchange will issue a circular intimating the listing of the security
The investee must pay stamp duty and provide receivables statement as well as original
stamp duty payment receipt to trustee for charge creation in Registrar of Companies.
This is to be done within 30 days from the date of issuance
Post completion, the investee should obtain a legal opinion and provide the same to the
investor
On-going compliance
The investee should fix a record date towards every payment of interest as well as
repayment
The investee should provide compliance details on a quarterly basis to the investor in the
form of compliance certificate from an independent Chartered Accountant

The investee should provide compliance details to the Exchange on half-yearly basis
under clause 27 of listing agreement
The investee should publish its limited review/ audited financials results every six
months in a leading daily
The investee should inform RBI on any rating change and should also issue a press
release in this regard
The investee should top-up the receivables on a periodic basis, if applicable
The investee should monitor any complaint on SCORES

On Maturity
Not applicable for NBFCs if issued on private placement basis.
The investee should inform the stock exchange on repayment for de-listing
The investee should initiate debit corporate action post repayment to extinguish the
units
The investee should file form 17 to satisfy the charge with ROC

Issue 6 (dated 12 March 2014). Contact us at contact.investments@ifmr.co.in

The activities to be undertaken are given below:

1
2
3
4
5
6
7

8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23

Activity List
Finalize the issue size & structure
Prepare Term sheet / Information Memorandum
Finalize the investors/subscribers
Get a rating from designated rating agency
Appoint the trustee (Finalize the commercials & take the consent letter)
Appoint the Registrar & Transfer Agent (Finalize the commercial & take the consent letter)
Apply for In principal approval from exchange by submitting following :(A) Soft copy in .pdf format and certified true copy of draft Disclosure document prepared as per SEBI
(Issue and Listing of Debt securities) Regulations, 2008.
(B) Self certification from the company secretary or authorized signatory confirming that the Disclosure
document has been prepared as per SEBI (Issue and Listing of Debt securities) Regulations, 2008.
(C.) Confirmation of the credit rating registered with the Board for the proposed issue
(D) Consent letter from the Debenture Trustee
(E) Latest Annual Report
(F) Memorandum and Articles of Association
Enter into Listing agreement with Stock Exchange
Enter into Tripartite agreement with Depository & R&T Agent
Submit the requisite form to depository for issue the NCD in demat mode
Get the final listing approval from stock exchanges by submitting the remaining documents
Submit the relevant documents to trustee for security creation
Execute the security related documents with trustee by submitting the requisite information
Pay the applicable stamp duty
File the necessary form with ROC for charge creation in consultation with trustee (Form 10)
Submit a copy of trust deed to stock exchange after executing the same
Submit the necessary report to Stock exchange on Half Yearly basis
Submit the necessary reports to trustee on Half yearly basis
Confirm to the trustee for interest payment
Confirm to the trustee for redemption
Execute the debit corporate action with depository
File the necessary form with ROC for removal of charges in consultation with trustee
Re-conveyance of property, if any, given as security

IFMR Investments' proposed social venture Alternative Investment Fund (AIF) will invest in debt instruments
issued by not only the larger sized MFIs but also facilitate funding across the sector to high quality smaller MFIs.
The targeted size of fund and subsequent sizeable lending to MFIs will also help in eliminating the NCD issuance
costing barrier, provided each investment meets the IFMR fund exposure norms and underwriting guidelines.
Through the proposed AIF, IFMR Investments is focussed on creating a long term debt capital market platform
for the microfinance sector.

Issue 6 (dated 12 March 2014). Contact us at contact.investments@ifmr.co.in