What is the minimum investment required for NCDs?

To invest in NCDs, the minimum amount required is ₹10,000. Typically, NCDs are issued in a minimum lot size of 10, with each debenture having a face value of ₹1,000.

How do Non-Convertible Debentures (NCDs) work?

Non-Convertible Debentures (NCDs) are essentially a way for companies to borrow money from investors. The company issues NCDs, and in return, they pay interest to the investors. The interest payment schedule (monthly, quarterly, annually, or cumulative) is decided beforehand. Once the NCD matures, the company repays the full principal amount to the investors. Here's how the process typically unfolds: • The issuing company announces the NCD offer, providing all essential details like the issue price, face value, coupon rate (interest rate), payment frequency, tenor (duration), credit rating, and other relevant information. • Interested investors can subscribe to the NCDs during the offer period, ensuring they purchase before it closes. • Investors can check their allotment status on the registrar's website. • If allotted, investors will receive the debentures directly in their demat account. • On the specified listing date, the NCDs are listed on the stock exchange. • The issuing company begins making interest payments according to the terms outlined in the NCD offer document. • Finally, investors receive their principal amount back, along with any applicable interest, on the maturity date.

What are the guidelines for Non-Convertible Debentures (NCDs)?

The guidelines for Non-Convertible Debentures (NCDs) are the rules and regulations established by SEBI in the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021. These regulations specifically outline: • The eligibility criteria for issuing NCDs. • The requirements and procedures for issuing and listing NCDs. • Explanations of terms related to NCDs. • The consequences for violating these regulations. • Schedules and annexures detailing the information and formats required for disclosure by the issuer.

NCD Issue Process

The journey of issuing Non-Convertible Debentures (NCDs) by public companies in India closely mirrors that of an Initial Public Offering (IPO). A company keen on offering NCDs must first appoint a merchant banker to oversee the issuance process.

Merchant bankers registered with the Securities and Exchange Board of India (SEBI) are responsible for the entire NCD issuance process. This comprehensive process involves preparing the issue document, conducting due diligence, managing the subscription and allocation, handling refunds, and executing post-issue activities.

Before diving into the issuance process, let's briefly explore the eligibility criteria a company must meet to issue NCDs.

NCD Eligibility

To issue NCDs, a company must meet specific conditions at the time of filing the draft offer document or the final offer document:

The company, its promoters, or directors should not be barred from accessing or dealing in the securities market, either directly or via another entity.
The company and its promoters/directors must not have any existing defaults.
The promoters/directors of the company should not be classified as fugitive economic offenders, meaning they should not have pending criminal proceedings or outstanding arrest warrants.
All fines or penalties imposed by SEBI or stock exchanges must be cleared by the issuing company.
The company should not have defaulted on interest or principal payments on previously issued non-convertible securities for over six months.

NCD Issue Procedure

The issuance of NCDs kicks off with the approval of the company's Board of Directors. Once the decision to issue NCDs is made, the company must follow these broad steps:

Appoint necessary intermediaries.
Submit the offering documents.
Issue the NCDs and list them on the stock exchange.
Make interest payments as per pre-determined terms.
Repay the principal on the maturity date.

Let's delve deeper into these steps:

1. Appointment of Merchant Bankers/Lead Manager

The company must appoint one or more SEBI-registered merchant bankers to lead the issue. If multiple bankers are appointed, their roles and responsibilities should be detailed in the offer document.

2. Appointment of Other Intermediaries

The issuer also needs to appoint other intermediaries to aid in the seamless execution of the NCD issuance. Agreements must be made with depositories for dematerialization in accordance with the Depositories Act, 1996. A trustee must be appointed for debt securities, and a registrar must be engaged to manage the allotment and redemption of the NCDs.

3. Preparation and Filing of Offer Documents

The merchant banker aids the issuer in preparing the offer documents (shelf, tranche, draft, or final). The issuer must secure in-principle approval from the BSE and NSE, and the draft document should be available for public comments on the stock exchange's website for seven working days after submission.

The offer documents must be uploaded to the issuer's and lead manager's websites. All public feedback on the draft document should be considered before filing with the company register.

4. In-principle Approval

The issuer needs to apply to the BSE or NSE for "in-principle approval" for listing its non-convertible securities. If applying to multiple exchanges, one must be chosen as the designated stock exchange.

5. Pricing and Determination of the Coupon Rate

The issuer determines the price and coupon rates of the NCDs, which can be either fixed or decided through a book-building process, though it's typically fixed.

6. Advertisement of NCD

Once the prospectus is filed with the registrar, the issuer must advertise the NCD issuance. Advertisements should adhere to specific guidelines to ensure they are clear, truthful, and not misleading.

Advertisements should appear in local and national English-language newspapers with substantial circulation near the issuer's registered office.
They must not mislead investors or contain manipulative content.
The information must align with the offering document and not feature unapproved elements like models or famous personalities.
All advertisements must be submitted to stock exchanges before the offer closes, and credit ratings should be disclosed.

7. NCD Subscription

Typically, an NCD issue stays open for 10 working days.
The issue should be subscribed to at least 75% of the base size.
If the minimum subscription isn't reached, all subscription money should be returned within eight working days of the issue's closure.

An oversubscription of up to 100% of the base issue size can be retained. For instance, with a base issue size of Rs 100 Cr, the issuer can retain an additional Rs 100 Cr, making the total issue volume Rs 200 Cr.

8. Allotment Process and Listing

The registrar manages the entire allotment process on a first-come, first-served basis. Once allocation and refunds are completed, the NCDs are listed on the chosen stock exchange(s), allowing investors to trade them in the secondary market.

Key Points:

Timely interest payments must be made according to the set schedule.
No monetary or in-kind incentives should be offered to any person connected with the offer.
At least one credit rating is required from a SEBI-registered agency.

An NCD issue may or may not be underwritten. The offer document must include:

An abridged prospectus and application form in the SEBI-prescribed format.
A recovery expense fund with the Designated Stock Exchange, amounting to 0.01% of the issue size (up to Rs 2,500,000), to enable Debenture Trustees to act promptly in case of default.

NCD Listing Requirements

The company issuing NCDs must comply with the listing requirements of the chosen stock exchanges. Here's a look at the listing procedures for both the BSE and NSE.

1. BSE NCD Listing Requirements

A. BSE NCD Listing Checklist

For listing purposes, BSE needs the issuer to submit:

A copy of the prospectus and the board of directors' details.
ISIN code for each NCD series.
Confirmation of redemption order processing.
Compliance Officer's statement confirming no SEBI Regulation breaches.
Listing agreement and capital distribution schedules.
Board resolution on security allotment.
Three-day monitoring report and statutory auditor's certificate.
Depository's confirmation on the lock-in period for dematerialized securities.
Registrar and Lead Manager's letter on share/bond dispatch and allotment notices.
Reconciliation report from the registrar.
List of the 200 largest allottees.
Certificate from the lead manager and issuer on compliance with SEBI Regulations.
Internal minutes between lead manager, issuer, and registrar.
Basis of allotment display and list of allottees on CD.
Registrar's confirmation letter to the merchant bank.

B. Documents for BSE In-principle Approval

For BSE approval, issuers need:

Board and shareholder resolutions authorizing NCD issuance.
Board resolution for BSE listing.
Debenture Trustee and Registrar's approval letters.
Dematerialization arrangement copy.
Credit rating certificate (not older than one month from issue opening).
Draft Disclosure Document/Shelf Prospectus copies.
Due diligence certificate for secured instruments.
SEBI SCORES ID.
SEBI Registration Certificate for the Lead Manager.
Issuer, promoter, and directors' details.
Undertakings from issuer and Lead Manager Banker.
Additional documents if the issuer is a new company.

C. BSE NCD Listing Fees

The BSE listing fees for public debt issues include:

Initial listing fees: Rs 20,000
Processing fees: 0.05% of the issue size (min Rs 50,000, max Rs 5,00,000), plus service tax.
IBBS Module usage fees: 0.001% of the issue size (min Rs 1,00,000, max Rs 10,00,000).
Annual listing fees vary based on listed capital, ranging from Rs 250,000 to Rs 10,20,000, with additional fees for increments above Rs 1000 Cr.

Note: Charges exclude GST.

D. BSE NCD Public Issue

For NCD listing on BSE, issuers must enter agreements with relevant parties and submit information/documents:

Agreement for online bids and applications.
Software use agreement with BSE.
Depository fees and refund beneficiary details.
Registrar and sponsor bank declarations.

At the allotment stage, additional documents are required based on whether BSE is the designated exchange.

The listing agreement must be submitted on Rs 100 stamp paper.

2. NSE NCD Listing Requirements

A. NSE NCD Listing Checklist

Similar to BSE, NSE has its own requirements and documents for NCD listing. Issuers can refer to the NSE Debt Public Issue checklist for necessary documents and application forms.

The checklist includes:

Application letter.
Listing application form.
Document list for new and existing capital market segment issuers.

NSE NCD Listing Fees

NSE's listing fees are generally higher than BSE's:

Initial Listing Fees: Rs 50,000
Annual Listing Fees range from Rs 2,90,000 for up to Rs 100 Cr, increasing with the capital size to Rs 12,20,000 above Rs 1000 Cr, with additional fees for increments.

Issuers can choose the designated exchange based on their needs and requirements.