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15 December 2020
The unprecedented and unanticipated business disruption brought about by COVID-19 has sharpened the focus on the importance of conservation and optimum utilisation of cash by various companies. In this context, the requirement for a company to maintain 15% of the value of all non-convertible debentures (NCDs) maturing in a year (NCD deposit requirement) by 30 April of that year in fixed deposits with scheduled commercial banks or other specified investments is likely to be a cause of concern.(1) This is especially true when considering the negative carry on such funds in a falling interest rate regime, as well as the opportunity cost of being able to utilise such available cash for the company's operations at a time when most companies' cashflows have been drastically affected.
In a welcome move, on 5 June 2020 the Ministry of Corporate Affairs (MCA) issued the Companies (Share Capital and Debentures) Amendment Rules 2020 (2020 Amendment Rules) doing away with the NCD deposit requirement for all listed companies (including non-banking financial companies (NBFCs) and home finance companies (HFCs)) in the context of their issuance of privately placed debentures.(2) This is in addition to the temporary relief previously provided by the MCA when it extended the timeline for complying with the NCD deposit requirement from 30 April 2020 to 30 June 2020.
This article examines:
While the requirement for companies to create a debenture redemption reserve (DRR) through appropriation from their profits is older, the MCA first introduced the NCD deposit requirement in 2013 for all companies which were required to maintain a DRR.(3) Therefore, by virtue of the NCD deposit requirement being tagged on to the DRR requirement, all companies which were exempt from the DRR requirement were also automatically exempt from the NCD deposit requirement. The same position was also carried into the rules framed under the Companies Act 2013 and continued until the introduction of the Companies (Share Capital and Debenture) Amendment Rules 2019 (2019 Amendment Rules), dated 16 August 2019.
As noted in the MCA press release accompanying the 2019 Amendment Rules, these rules were notified with the aim of improving the ease of doing business for companies in India, and reducing the cost of capital raised through debentures, and with the expectation that the amendments would significantly deepen the bond market. The 2019 Amendment Rules provided welcome relief to listed companies by doing away with the DRR requirement in certain cases. However, due to what appeared to be an inadvertent cross-referencing error, the 2019 Amendment Rules imposed the NCD deposit requirement on listed NBFCs and HFCs, which were formerly exempted from this requirement, in respect of privately placed debentures issued by them. This was at complete odds with the intent of the 2019 Amendment Rules as expressed in the MCA press release and the 2019 to 2020 budget announcements pursuant to which the amendments were made. It was also widely felt that the objectives of the 2019 Amendment Rules would be better achieved if all listed companies which had been exempted from the DRR requirement were also exempted from the NCD deposit requirement.
The 2020 Amendment Rules have restored the status quo for listed NBFCs and HFCs by exempting them and other listed companies from the NCD deposit requirement in relation to privately placed NCDs. The 2020 Amendment Rules have also gone a step further and exempted other classes of listed company from the purview of the NCD deposit requirement. The MCA's move came in the nick of time as 30 June 2020 was the deadline for these companies to have complied with the NCD deposit requirement. The amendment is significant and will assist in freeing up vital cash resources of listed companies which would have otherwise been kept idle and blocked for compliance with the NCD deposit requirement.
Even after the 2020 Amendment Rules, unlisted companies (other than NBFCs and HFCs) must still comply with the NCD deposit requirement for privately placed NCDs issued by them. It may be worthwhile to consider whether this requirement can also be done away with. While the suggestion of doing away with the NCD deposit requirement may, at first glance, appear controversial, it may not be as outlandish as it sounds, especially in the context of privately placed debentures which are usually subscribed to by institutional players as opposed to retail investors (particularly when the efficacy, or lack thereof, of the requirement in its present form is considered). At present, the NCD deposit requirement functions more as a compliance requirement rather than something which offers any genuine protection to NCD holders. This is evident from the following:
This seeming irrelevance of the NCD deposit requirement is also buttressed by the fact that it is typically not commercially or otherwise construed as a security and is usually not given any weightage by rating agencies or investors when assessing a particular NCD transaction.
Considering the COVID-19 pandemic's crippling effect on liquidity, it may also be worth re-examining the utility of the NCD deposit requirement and doing away with it, either altogether or at least in the context of all private placements, irrespective of the nature of the issuer company.
For further information on this topic please contact Gautam Ganjawala or Karthik Mudaliar at AZB & Partners by telephone (+91 22 4072 9999) or email (firstname.lastname@example.org or email@example.com). The AZB & Partners website can be accessed at www.azbpartners.com.
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