Appendix 52
TEXT Of GUIDELINES FOR ISSUE OF DEBENTURES BY PUBLIC LIMITED
COMPANIES AND PUBLIC SECTOR COMPANIES
GUIDELINES FOR ISSUE OF DEBENTURES BY PUBLIC LIMITED COMPANIES AND
PUBLIC SECTOR COMPANIES
These guidelines are issued
in supersession of the guidelines issued by Government on April 17, 1982.
1. Applicability‑ The guidelines will apply to issue of secured
convertible as well as nonconvertible debentures by public limited companies
and public sector companies.
2. Objects of issue‑ The objects of the issue can be one or more of the
following
(i) Setting up of new projects;
(ii) Expansion or diversification of existing projects;
(iii) Normal capital expenditure for modernisation;
(iv) Merger/amalgamation of companies in
pursuance of schemes approved by banks/financial institutions and/or any legal
authority;
(v) Restructuring of capital as approved by
banks/financial institutions and/or any other legal authority;
(vi) Acquisition of assets in accordance with
legal provision and/or MRTP Act; and
(vii) To augment long‑term resources of
the company for working capital requirement.
3. Quantum of issue‑ The amount of issue of debentures in the case
working capital requirements shall not exceed 20 per cent of the gross current
assets, loans and advances. The amount of issue of debentures for project
financing and other objects will be considered on the basis of the approvals of
the scheme of finance by the financial institutions1banks/Government under the
provisions of the MRTP Act, etc.
In case of oversubscription
to the issue of debentures mentioned above, the companies may be permitted to
retain subscription for non‑convertible debentures up to a maximum of 50%
over the original issue for which consent was originally obtained from the
Controller of Capital Issues subject to the other conditions being fulfilled.
4. Debt‑equity ratio‑ The debt‑equity ratio shall not
normally exceed 2 : 1. For this purpose
"Debt" will mean
all term loans, debentures and bonds with an initial maturity period of five
years or more, including interest accrued thereon. It also includes all
deferred payment liabilities but it does not include short‑term bank
borrowings and advances, unsecured deposits or loans from the public,
shareholders and employees, and unsecured loans or deposits from others. It
should also include the proposed debenture issue.
"Equity" will mean
paid up share capital including preference capital and free reserves.
Notes: 1. The computations under guidelines 3
and 4 mentioned above will be based on the latest available audited balance‑sheet
of the company.
2. A relaxation in the norm of debt‑equity
ratio of 2:1 will be considered favourably for capital‑intensive projects
such as fertilizers, petrochemicals, cement, paper, shipping, etc.
1[5. Interest
rate‑
In the case of convertible debentures issued by non‑MRTP and non‑FERA
companies, the rate of interest shall not exceed 15 per cent per annum. In
respect of issue of convertible debentures by companies falling within the
scope of the MRTP and the FERA Acts, the maximum rate of interest shall be
[13.5 per cent per annum.] In the case of non‑ convertible debentures,
the rate of interest shall not exceed 15 per cent per annum.]
Ness Note dated 31‑3‑1987.‑ "In modification of
the existing guidelines, the maximum rate of interest payable on debentures to
be raised henceforth by companies is being reduced by one percentage point per
annum, from the existing levels.
The new rates, effective
from 1‑4‑1987, will be as follows:
|
Type of Company |
Maximum rate of interest payable on |
|
|
|
Convertible Debentures |
Non-Convertible Debentures |
|
Non‑MRTP/Non‑FERA |
14 per cent p. a. |
14 per cent p.a. |
|
MRTP/FERA |
12.5 per cent p.a |
14 per cent p.a. |
Issues that have opened for
subscription before 1st April, 1987, will continue to be governed by
the old guidelines. These issues should not be kept open for accepting
subscription beyond the notified amount. No application would be considered for
retention of excess subscription beyond the normal limit of 25 per cent of
Convertible Debentures and 50 per cent for Non‑Convertible Debentures
subject to the usual conditions."
All restrictions on interest rates on debentures removed,‑ In modification of the
existing guidelines on the interest rates on debentures and public sector
bonds, it has been decided that all restrictions on interest rates on
debentures and public sector bonds, other than the Tax‑free bonds of the
public sector undertakings, are being removed. The interest rate on such debt
instruments will hereafter be governed by the market forces. Companies before
floating debentures would obtain a rating for their debt instruments from
Credit Rating Agencies.
All other guidelines with
regard to the issue of debentures and public sector bonds will remain
unchanged.
The interest rate for tax‑free
bonds to be issued by public sector undertakings will be 9 per cent (Fixed).
[Press Note issued by the
Ministry of Finance, Department of Economic Affairs, office of the Controller
of Capital Issues on 1‑8‑1991.]
Credit Rating on Debentures Optional.‑ In modifications of the
earlier guidelines on the interest rates on debentures and public sector bonds,
a Press Note was issued on 1‑8‑1991, stating that all restrictions
on interest rates on debentures and public sector undertakings are removed. the
interest rate on such instruments is, therefore, governed by the market forces
and the companies are required to obtain credit rating before floating these
instruments. It is now clarified that credit rating for public sector companies
issuing bonds will be optional and not compulsory. Similarly the private
placement of NCDs with Financial Institutions and Banks, credit rating will be
optional and not compulsory. However, credit rating for placement of NCDs with
Mutual funds will be necessary as mentioned in our Press Note of 1‑8‑1991.
[Press release issued by Department of Economic Affairs, Office of the CCL on 3‑10‑1991.]
Credit Rating Optional For Public Sector Bonds and Private Placement of
Debentures with Financial Institution Debentures:
In continuation of our Press
Note of 3rd October, 1991, making Credit Rating optional for public sector
bonds and private placement of Debentures with Financial Institutions/Banks,
Credit Rating will be optional and not compulsory in the following other cases
also:
(i) Issues of Non‑Convertible
Debentures upto Rs. 5 crores on private placement basis including with Mutual
Funds.
(ii) All issues of Fully Convertible Debentures
where these are to be compulsorily converted into equity within 18 months from
the date of allotment at pre‑determined price. [Issued by the Ministry of
Finance, Department of Economic Affairs, Office of the Controller of Capital
Issues vide F.No. S 11(4)‑CCI(11)/91, dated 24‑10‑1991.]
6. Period of redemption‑ Debentures shall not normally be redeemable before
the expiry of the period of seven years except in the following cases:
(i) A company will have the option or
redeeming the debentures from the 5th to the 9th year from the date of issue in
such a way that the average period of redemption continues to be seven years.
While exercising such an option the small investors having debentures of the
face‑ value not exceeding Rs. 5,000 will have to be paid in one
instalment only.
(ii) In case of non‑convertible
debentures or non‑convertible portion of convertible debentures a company
may have the option of getting the debentures converted into equity fully with
the approval of and at such price as may be determined by the Controller of
Capital Issues. The debenture holders will, however, be free not to exercise
this right.
7. Price at the time of redemption.‑ A premium up to 5% of the
face‑value can be allowed at the time of redemption in the case of non‑convertible
debentures only.
8. Denomination of debentures.‑ The face‑value of the
debentures will ordinarily be Rs. 100 each.
9. Listing of debentures.‑ The debentures shall normally be listed on
the Stock Exchanges except in the following situations :
(i) Companies may make private placement of
non‑convertible debentures with banks/financial institutions and such
agencies (e.g. Army Group Insurance Scheme) as are approved by C.C.I.
(ii) Companies may make private placement of
non‑convertible debentures with corporate bodies and individuals with the
approval of C.C.I.
10. Security of debenhwes.‑ Only secured debentures will be permitted for
issue to the public.
11.Underwriting of debentures.‑ The issue of debentures
shall be underwritten. A relaxation may be permitted in this regard if the
Controller of Capital Issues is otherwise satisfied that the issue need not be
underwritten.
12. Listing of shares of companies proposing debenture issue.‑
(i) The shares of the company pro‑posing
to issue debentures must be listed in one or more stock exchanges and the
market quotation of its shares must have been at or above par value during six
months prior to the date of application for the issue of debentures.
(ii) Simultaneous listing of shares and debentures
of companies will also be permitted.
(iii) The provision regarding listing of shares
will not apply to public sector companies provided (a) the fair value of the
shares of such companies is equal or more than the par value, and (b) such
companies have declared dividend in the year immediately preceding the year of
proposed issue.
13. Linking of share issue with debenture issue.‑ Linked issue of shares and debentures may be permitted only in cases
where the interest rate offered in respect of non‑convertible debentures
is not more than the maximum rate prescribed for the convertible debentures.
Simultaneous issue of equity and convertible/non‑convertible debentures
may be permitted Provided the investors are free to subscribe to either shares
or debentures or both at their option. )
14. Extra incentives.‑ Schemes which aim at providing an interest rate
exceeding 13.5% but which have built‑ in features of the convertible
debenture issue will not be permitted.
Provision of non‑financial
incentives which result in restricting the access to a company's products by
the general public or which have other undesirable features, will not be
permitted.
[Issued by the Government of
India, Ministry of Finance, Department of Economic Affairs, Office of the Controller
of Capital Issues, New Delhi, dated September 19, 1984. Ref (1985) 57 Com Cases
(St) 154.]
Deviation from the guidelines.‑ The guidelines have only an
advisory role to play and non-adherence to or deviation from them, is
necessarily and implicitly permissible if the circumstances so warrant. The
Courts will interfere only where the deviation is arbitrary or discriminatory
or undermines the basic purpose of the Act and the guidelines. Narendra Kumar
Maheshwari v. Union qf India, (1989) 2 Comp LJ 95, 143 (SC).