MCA’s latest draft rules for public deposits, once enacted, will mean end of the bond markets in India, particularly for non-banking non-financial companies. Almost every possible reason and avenue for companies to issue bonds has been killed
The regulatory framework for companies is undergoing an overhaul with the Companies Act, 1956 being replaced by Companies Act, 2013 and new rules thereon. The lawmakers have been mindful of the present regulatory scenario while drafting the new laws. One of the issues of key concern to the law makers has been deposit acceptance by non-banking non-financial companies. In the past, hundreds of companies have defaulted in payment of deposits to depositors, many of whom lost their life’s savings. In this pretext, in 2009, draft of the Companies Bill, there was proposed a blanket bar on deposit-taking by non-banking non-financial companies.
The new regulatory regime for acceptance of deposits makes a distinction between member deposits, and public deposits. On 22nd October, the Ministry of Corporate Affairs (MCA) placed the draft rules on Acceptance of Deposits by Companies on its website and is currently open for public comments. Under the proposed rules corporates will have scanty options for raising funds by issuance of securities yet falling out of the definition of public deposits. It will not be an understatement to say that the MCA’s latest draft rules for public deposits, once enacted, will mean end of the bond markets in India, particularly for non-banking non-financial companies (NBNCs). Almost every possible reason and avenue for companies to issue bonds has been killed.
Below the author discusses each of the options that could have been available and have been possibly clogged by regulators:
Funding sources for companies: Debt capital
Some of the exclusions to the definition of public deposits which corporates could tap on for raising funds include:
Issuance of bonds/ debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets excluding intangible assets has been excluded from the definition of deposits. Further, the value of the security shall be for the amount remaining unsecured after creating insurance on deposit.
There is a huge regulatory disincentive for any company to issue bonds. Mandatorily, bonds have to be secured by first charge. It is trite knowledge that most corporate assets are already subject to first charge of bankers/ lenders, and none of them will be willing to cede a pari passu first charge in favour of bondholders.
Some one has to convey to our regulators that world over, bonds are unsecured; if companies had assets to collateralise bonds, they would rather go for traditional lending methods than look at capital markets.
Further the debenture redemption reserve requirements also act as a disincentive for corporates from compliance perspective to raise funds through debenture issuances.
Compulsorily convertible debentures (CCDs)
Issue of bonds/ debentures that will be compulsorily convertible into shares of the company within five years also fall out of the scanner of deposits.
This again does not seem lucrative as the shareholding of the company get diluted. The company and its shareholders do not have an incentive in raising funds by this mode of security.
Optionally convertible debentures (OCDs) have completely been barred. This exactly is a sample of reactive lawmaking. If Sahara misused OCDs, let us not have OCDs at all! After all, OCDs are an interesting instrument for a company to raise money cheaper than non-convertible debentures (NCDs), and the prospect of appreciation may easily drive retail investors to feel interested in OCDs. Other than the Sahara episode, one fails to understand what could have been the problem with OCDs. Interestingly, both the Reserve Bank of India (RBI) for NBFCs, and the MCA for NBNCs have blocked OCDs as an instrument.
Commercial paper & NCDs
Issue of commercial paper or any other instrument issued in accordance with the guidelines or notification issued by the Reserve Bank of India are exempted from the definition of deposits.
The language of the draft rules exempting “any other instrument issued in accordance with the guidelines/ notifications issued by RBI” includes NCDs issued for tenure of not more than a year.
Both commercial paper and NCDs are short term instruments and does not address the long-term and/ or medium term fund requirements of a company. Surely these cannot be depended on for scaling up or expansion type activities. Also, obviously, NCDs can be used only for short term requirements and does not help companies to meet their long term requirements in any way.
Other securities that a corporate can issue for fund raising are as follows:
Preference shares are not any innovative instrument, but have been used for raising funds in a company. In the pretext of the proposed rules one had to scout for options on fund raising, preference shares would be another option available in hand.
However, tax dis-incentives on dividend distribution tax with regard to preference shares do not make them any popular mode of raising funds with corporate entities.
Subordinated debt is also a way of raising funds, but is typical for non-banking financial companies to issue sub-debt as sub-debt qualifies as Tier II capital. No such motivation/ incentive are available for corporates to explore this option.
The current choices to fall out of the scanner of public deposits are very limited and do not incentivise the corporates to issue securities to facilitate the growth of the bond market.
It seems the law making is working with the motivation of plugging the loopholes in the existing regulatory regime. The mood seems as if the law makers do not want corporates to take action at all as there is a lurking fear that something may go wrong. In an attempt to regulate the corporate sector, the law makers have ended up tightening the regulatory noose for the corporates.
As a nation, we need to realise that exceptions cannot drive the rule. Sahara was an exception, an outright scam. Not because of lack of law, but because for years, no one bothered to check the implementation of the law. And in any case, if scams become the reason for lawmaking, and the objective is a scam-free system, then we have to think of a system that does not move at all, because that is the only scenario which has no risk of scams. It is so unfortunately that a spate of reactive law making.
The very fact that law making should not be impulsive was rightly brought to the forefront in the Damodaran Committee report recommendations as well1.
(Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd.)
1 Read our views on the Damodaran Committee report recommendations – “Will we see policies that are not impulsive law making” here https://india-financing.com/will_we_see_policies_that_are_not_impulsive_law_making_damodaran_committee_recommendations.pdf
Gujarat NRE, a product of the resource bubble of 2007, recently came under scrutiny for questionable corporate governance practices. Here is how a small Australian paper in the mining town of Illawarra reported about the lavish lifetyle of the promoters and their shenanigans even as the company sank
Beleaguered miner Gujarat NRE Coke Ltd (GNCL) has initiated its corporate debt restructuring (CDR) program with major lenders to get rid of its toxic debt, according to a filing on BSE. The company has been unable to pay off its debts for the last few months and even could not pay its miners in Australia. This company had stormed the small mining town of Illawarra and has since been the central talking point of that town’s small society. Illawarra Mercury, a local newspaper has been closely following the company’s Australian subsidiaries for its questionable corporate governance practices and inability to keep its promises to its miners.
The real problems started in earlier sometime back but this year GNCL admitted it could not repay its debts. Then, in July, the Australia environmental regulator, Clean Energy Regulator, slapped charges on the company’s Australian mines for failing to pay up carbon credits as per Australian environmental regulations. Problems mounted further as the company was included in the list of biggest environmental polluters in the country. The company tried to desperately raise cash by selling off various assets, including some of its wholly-owned subsidiaries in Australia.
According to Illawarra Mercury, one of the company’s subsidiaries owned a multi-million dollar home to accommodate Arun Jagatramka, but sold it for way more than the market value to parties closely associated with the Jagatramkas – a typical Indian trick by Indian businessmen to keep the assets private and the debts public. A mansion, at a coveted address, bought at $5 million, was sold off for $10 million, according to Illawarra Mercury, to Besant International owned by a person called Kunal Chandak. The Jagatramkas were also spotted in a local derby (a horse race and frequent hang outs for the rich and famous) with the Chandaks.
The paper also reported that as many as 500 workers from both the Russell Vale and Wongawilli mines in Australia, have not been paid for weeks, reportedly totalling $5 million, and it is still not certain whether they will be paid at all. Their future is insecure. The Australian local even reports that families of miners are finding it hard to make ends meet. Despite the Jindals taking over the Australian mines, their future still remains uncertain. Bob Timbs, who represents the workers of Gujarat NRE Coke’s Australian mines was reported saying, “...even the most optimistic of Gujarat’s workers are becoming deeply cynical by the flim flam that has come from (Gujarat NRE Coking Coal) head office.”
While the miners continued to suffer, the Jagatramkas continue to live a lavish lifestyle. Illawaya Mercury reports that during one of its meeting with shareholders and miners, on 16 October, Arun Jagatramka came in a shiny Bentley, decked up in a tailored suit while the workers were donning their usual ‘dusty highs’.
His extravagances didn’t include just horse races and a Bentley. Being an avid sports fan, the Jagatramkas even sponsor an Australian basketball sports team—Woologong NRE Hawks—with Gujarat NRE embezzled on the team’s jersey. A quick glance at Jagatramka’s twitter account will show tweets of mainly sport-related items, mostly of of his sponsored team, Hawks.
All this comes at a time Gujarat NRE Coking Coal Ltd (GNCCL), the Australian company, relinquished its majority stake to Jindal Steel & Power (Jindal), with the latter holding 53.63%, to pay off its debts and pay outstanding salaries to miners.
The company has come under heavy fire for its questionable corporate governance practices. Shortly before GNCL adopted its accounts for the 2012-13 fiscal, Grant Thornton, the company’s auditors for GNCCL, said that they could not express an opinion on the financial statements since they have doubts on the company's ‘Going Concern’ assumption, valuation of impairment and assets, deferred tax assets, recoverability of trade receivable and completeness of contingent liabilities. Shockingly, it was discovered recently that ICAI president Subodh Agrawal, who is also chairman of the audit committee of Gujarat NRE Coke, recommend unaudited financials of the company’s Australian subsidiaries to the Board of Directors, knowing fully well that they are highly material amounts.
The company told shareholders that in its consolidated financial statements, 91% of its assets and 64% of its revenues, which are in Australian subsidiaries, are unaudited!
The RTI is one of the most powerful tools and an essential democratic right of every Indian citizen. A handy guide takes you through the steps to file an effective guide
The Right to Information Act, 2005 (RTI) that came into force eight years back has proven to be one of the most powerful tools put to use by every Indian—big and small—to obtain information that was all along denied under the garb of ‘official secrecy’. Thanks to the benefits of the RTI, many of India’s biggest scams and scandals are now exposed.
Deepak Sandhu, chief information commissioner (CIC), very rightly says, “RTI is a game changer. It has democratised information to the citizen’s advantage. The citizen is central in the Act. Other countries offer freedom of information while our legislation recognises it as a right.”
Here are a few tips to make effective use, to extract the most appropriate response, and minimise the possibilities of rejection on frivolous grounds.
(Nagesh Kini is a Mumbai-based chartered accountant turned activist.)