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 “deposits”:
“(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 India;”
“(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.