Money & Banking
NBFCs’ issuance of secured NCDs in trouble as Companies Act, 2013 and draft rules’ whammy

The only options left with NBFCs are issuance of compulsorily convertible debentures with no tenure limit on the conversion or contingently convertible debentures or a third instrument that the market may innovate

The Companies Act, 2013 is turning out to be opening a pandora box for non-banking finance companies (NBFCs). So long the NBFCs were struggling to ensure that the debenture issuances did not trespass into the domain of public deposits and were beginning to understand that optionally convertible debentures market will die out slowly that the draft rules have thrown language open to interpretation.

The reading of the Section 71 of the Companies Act, 2013 read with the draft rules indicates that the debenture issuances have to be secured by specific moveable and immoveable properties. NBFCs may have a hard time in finding these specific moveable and immoveable properties for secured debenture issuances. To throw some light on the issue, it is pertinent to read the text of the section and the extract of relevant draft rules as reproduced below.

Section 71 of the Companies Act, 2013 states that –

  1. A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption:

Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at general meeting

  1. No company shall issue any debentures carrying any voting rights.
  2. Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed (emphasis ours).
  3. Where debentures are issued by a company under this section, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures.

The draft rules 4.16 applicable for section 71 (3) states that –


4.16. (1) For the purposes of sub-section (3) of section 71, no company shall issue secured debentures unless it complies with the following conditions:

(a) An issue of secured debentures may be made, provided the date of its redemption shall not exceed 10 years from the date of issue. 
Provided that a company engaged in the setting up of  infrastructure projects may issue secured debentures for a period exceeding ten years but not exceeding thirty years;

(b)  such an issue of debentures shall be secured by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon;

(c)  the company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than 60 days after the allotment of the debentures, execute a debenture trust deed to protect the interest of the debenture holders ; and

(d)  security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-


(i) any specific movable property of the company (not being in the nature of pledge), and/or

(ii) any specific immovable property wherever situate, or any interest therein.

The whammy

As mentioned, the reading of the section and the draft rules indicate that there has to be specific moveable/ immoveable property for security creation. The term ‘specific’ property does not relate to creation of floating charge but implies that there should be a specific and identifiable asset ear-marked for the purpose of creating security.

The term charge on specific (moveable/ immoveable) property cannot be interpreted to mean floating charge as in case of floating charge the asset is not specifically identified. The charge crystallises at the time of enforcement as opposed to charge on specific property which remains ring-fenced as security and renders priority in claims.

For anyone understanding the business and functioning of NBFCs it will be a no brainer to realise that NBFCs do not have immoveable properties on their balance sheet unlike manufacturing entities which would have land/ plant & machinery etc to offer as charge. NBFCs are financial institutions into the business of lending and their asset sides would be dominated by receivables as moveable property. However, clearly the problem here is that the receivables are amortising in nature and one cannot ear-mark/ ring fence them, call them ‘specific’ to create charge on them for the purpose of issuance of secured debentures.

What’s left on platter?

While the rules have not been enforced, if we were to consider that the final rules would contain the language same as draft rules, the conclusion that can be drawn is pretty clear. In the domain of issuance of debentures by NBFCs, optionally convertible debentures will now be public deposits and there are issues of finding the collateral for issuance of secured debentures. The only options left with NBFCs are issuance of compulsorily convertible debentures with no tenure limit on the conversion or contingently convertible debentures or a third instrument that the market may innovate for as they say, necessity is the mother of inventions.

(Nidhi Bothra is executive vice president at Vinod Kothari & Company)


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ONGC is a cash-cow for Indian government

ONGC has tremendous potential to serve the nation and reward its shareholders, both in dividends and value appreciation

Recently, it may be recalled that when the government wanted to divest from Coal India Ltd by a buy-back arrangement, there was a huge public outcry, essentially from its employees, who threatened to go on a strike. At this point of time, the government was desperate to get enough cash to cover the current account deficit. Ultimately, they planned and executed a simpler method of getting the required cash, by ensuring Coal India paid out a large dividend. Which they did, by giving away Rs29 as interim dividend on a share with a face value of Rs10!


In fact, dividends from Coal India amounted to Rs5,695 crore in 2011-12, which moved higher to Rs7,959 crore in 2012-13 and to Rs16,486 crore in 2013-14!


ONGC, however, did not fall in the same league as Coal India, in terms of total pay-out. It remained almost steady at Rs5,775 crore in 2011-12 and moved on to Rs5,627 crore in 2012-13 and has, in fact, declined to Rs2,961 crore in 2013-14. The final dividend for 2013-14 is likely to be announced a few months from now. All these because, in the case of ONGC, the operations are very different from mining for coal, as, many times, a prospective well that may initially show signs of being a potential supplier may turn out to be a non-viable proposition. Actuals vary, but a ball-park estimate of $200 million to drill exploratory wells will not be off the mark!


In a strategic move, ONGC Videsh Ltd, the overseas arm of ONGC paid

$561 million (Rs3,470 crore) for a 12% stake in Brazil, taking their holdings to 27% while Royal Dutch Shell held 73% in the deep water offshore block

BC-10 located in Campos basin. Work is progressing, satisfactorily so far.


Back in India, ONGC, continues its investigations to obtain coal bed methane in Jharkhand and West Bengal. It has resumed drilling in West Bengal and out of 11 wells, five have been taken in partnership with Oil India (which has 25% stake).


In the KG basin, ONGC has plans to spend some $9 billion by 2017-18. However, this area has recently become problematic, in as much as 11 of its oil and gas discoveries sit close to Reliance Industries Ltd (RIL)'s KG-D-6 block and Gujarat State Petroleum's Deen Dayan gas fields. This block is divided into a Northern Discovery Area (NDA) and a Southern Discovery Area (SDA), and, according to NK Verma, director - technical (exploration) of ONGC, they are looking at the possibility of producing 2.5 to 3 million tonnes of oil per annum and 9 to 10 cubic metres of gas per day. Present estimates are 92.30 million tonnes of oil and 97.568 billion cubic metres of in-place gas reserves spread over seven fields


ONGC was lucky enough to have bought 90% interest in block KG-DWN-98/2 from Cairn in 2005 and it still holds the balance of 10%.


In the recent past, ONGC officials felt that reservoir continuity could be one reason why RIL may be actually drawing up from their pool. Since this sort of mix-up can occur when blocks are located close to each other, and actual reservoirs are miles below the earth. In order to resolve this issue, technical teams from Reliance and ONGC are working to find out if there is actually a connectivity of the reservoir in the east coast gas producing block. If there is no consensus, an independent expert will have to be appointed to examine the data, which may eventually lead to prorata allocation of volume, once the connectivity of the reservoir is established.


RIL and ONGC have inked a memorandum of understanding (MOU) on this to settle the issue.


In the long run, it is imperative that a Regulator is appointed to deal with such matters as this will be binding on all parties concerned, considering the fact that so many areas will be offered for exploration in due course, with NELP X around the corner.


Apart from its overseas aspirations, ONGC has been successful in striking gas in Madhya Pradesh in Nohta, in Damoh district, in 2012. In fact, in course of the next two years, ONGC has reported discovering gas in all four wells in Damoh, Jabera-Katni near Jabalpur. Since the discovery is considered significant, according to Mr Verma, Director Technical, the company plans to drill five more appraiser wells in the block to assess the potential. Initial test reports indicate that the hydrocarbon resources have been found to be concealed under nearly 2 km thick hard rock cover, involving challenging work where extraction may not be easy. Yet, the engineers are working on this difficult terrain.


In the meantime, it is gratifying to note that ONGC has signed a pact with Mitsui of Japan for oil and gas exploration in India and 3rd countries. This agreement would pave way for opportunities such as setting up a regasification terminal at Mangalore or any other mutually identified locations, including marketing of regasified LNG.


So, in the long run, ONGC has tremendous potential to serve the nation and reward its shareholders, both in dividends and value appreciation.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


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