Private placement of NCDs for HFCs and the new Companies Act

Will the NHB's directions on private placement of NCDs by HFCs be effective with the near enforcement of Companies Act, 2013?

In what seems to be a clear after thought, Housing finance industry regulator, National Housing Bank (NHB) on 19 March 2014 came up with directions for the issue of non-convertible debentures (NCDs) by housing finance companies (HFCs). With the directions of Reserve Bank of India (RBI) on issue of NCDs by private placement by non-banking finance companies (NBFCs) issued on 27 June 2013 () (June 2013 Directions) leaving a clear gap, this was an expected move by the NHB.  In this write up we intend to bring out the highlights of the stated directions and also to analyze the impact that the Companies Act, 2013 will create on the effectiveness of these directions.
 

Why the need for separate guidelines?
 

The RBI’s guidelines are applicable to NBFCs as defined in Section 45 I (f) read with Section 45 I (c) of the RBI Act, 1934. Therefore, the guidelines are applicable only to the NBFCs registered with the RBI and not to HFCs, though being NBFCs they have to be registered with NHB. Hence, there was a need to come up with specific set of directions for issue of NCDs by HFCs. The gap, earlier created, has now been bridged by NHB through the directions issued on March 19 2014 (“March, 2014 Directions”).
 

Highlights of March 2014 Directions:
 

The highlights of the stated directions are:

  1. Eligibility Criteria – Only HFCs having net owned funds of Rs10 crore as per the last audited balance sheet are allowed to issue NCDs on private placement.
  1. Rating requirement – The NCDs needs to be rated from any of the following credit rating agencies – the Credit Rating Information Services of India Ltd (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd (ICRA) or the Credit Analysis and Research Ltd (CARE), or the FITCH Ratings India Pvt Ltd or Brickwork Ratings India Pvt Ltd or such other agencies registered with Securities and Exchange Board of India (SEBI) or such other credit rating agencies as may be specified by the National Housing Bank.
  1. Maturity of the security – The maturity period of the NCDs shall not be less than 12 months, but it should not exceed the validity period of the credit rating, if any. In case of put/call option, the exercise date shall not be within 1 year from the date of issuance.

The NCDs having tenure of less than 1 year are anyways covered by the Non-Convertible Debentures (Reserve Bank) Directions, 2010 , which regulates the issuance of NCDs having maturity of less than 1 year but more than 90 days. Those directions are applicable to all the participants of capital market; hence the HFCs coming out with private placement of NCDs of maturity of less than 1 (one) year are also covered by these directions.

  1. Subscription criteria – The maximum number of investors to whom the NCDs can be issued has been restricted to 49, with the minimum subscription being Rs25 lakh for a single investor and in multiples of Rs5 lakh thereafter.
  1. Quantum of issuance by the HFC – The maximum amount of NCDs that a HFC can issue is the lower of the following –
    1. Amount as decided by the Board of Directors; or
    2. Amount prescribed by the Credit Rating Agencies, if any.
  1. Security – The NCDs will have to be secured at all points of time. If at the time of the issuance, the security cover is insufficient/ not created, the issue proceeds shall be placed under escrow until creation of security, however such security creation shall be completed within 1 month from the date of issue. This direction is not applicable in case the HFC is issuing sub-ordinate debt instruments or hybrid debt instruments. However, the directions are silent with respect to the type of security to be created.
  1. Other highlights –
  1. A debenture trustee has to be appointed for the issuance of NCDs through private placement.
  2. Lending against own debentures has been barred for the HFCs.
  3. While issuing other provisions laid down by SEBI (Issue and Listing of Debt Securities) Regulations, 2008, Companies Act, 1956 or any other law that may be applicable.

Impact of the Companies Act, 2013 on the effectiveness of these directions:
 

The March, 2014 Directions state that HFCs are to comply with all other applicable laws at the time of issuance, so if any HFC issuing NCDs after the Act, 2013 gets enforced, will have to also comply with the provisions of the stated act as well. We detail below the effect that the provisions of Act, 2013 can have on such issuances.
 

Applicability of Draft Deposit Rules to HFCs
 

Peculiarly, where the extant Public Deposit Rules, 1975 are not applicable to HFCs, the draft Public Deposit Rules, 2013 seems to have been so ambitiously drafted that it has altogether not considered HFCs at all. To put it simply, the draft Public Deposit Rules, 2013 are applicable to HFCs also.
 

As per rule number 2 (ix) of the draft Public Deposit Rules, 2013, any amount accepted by the company by way of issuing bonds and debentures without adequate security covered by first charge or charge ranking pari passu to the first charge on any assets which are mentioned in the Schedule III of the Act, 2013, shall be treated as deposits. However, the rules also specify that the debentures which are compulsorily convertible in to equity shall not be treated as deposits in the hands of the issuer.  Thus, issue of NCDs by private placement may be classified as a deposit unless they are adequately secured.
 

Creation of charge on the issue of NCDs
 

Though the directions remain silent with respect to the nature of charge to be created by HFCs to back the debentures, but the applicability of the Act, 2013 brings in various complexities. After going through Section 71 of the Act, 2013 and the draft rules, dealing with debentures, what we understand is that NCDs cannot be issued unless it is secured by charge created on specific movable or immovable properties. Mostly, NBFCs issue NCDs secured by receivables and for obvious reasons. We typically cannot expect NBFCs to own a tangible asset. Now since the draft rules under Act, 2013 require charge to be on specific movable and immovable property, HFCs may have to create charge only on any movable or immovable property. This particular provision, which is still in the draft stage, if gets enforced then will impact harshly not only the HFCs but also the entire non-banking financial sector as a whole.
 

Private Placement of NCDs under Act, 2013
 

The draft rules of the Companies Act, 2013 with respect to the private placement of securities provides exemption to the NBFCs registered with the RBI from the provisions of Section 42 of the Act, 2013, which deals with the private placement of securities. Though the HFCs are NBFCs, but they are registered with NHB, thus they fall within the purview of Section 42.  The section lays elaborate provisions; some of them have been discussed below:
 

  • Maximum number of allottees is 50.
     
  • A company cannot come up with a fresh private placement unless allotment with respect to earlier offer or invitations has been made.
     
  • The companies are to allot the securities within 60 days from the date of receipt of application money.
     
  • The companies will not be able to make any advertisements in public that the company is coming out with private placement of securities.
     

If the company accepts any money in contravention of this section then the company, its directors and the promoters shall be liable with a penalty of Rs2 crore or the amount involved in the offer or invitation, whichever is higher. The company will also have to refund the money so collected within a period of 30 days of the order imposing the penalty.
 

As per the draft rules, the company will also require a special resolution for making an offer or inviting people for issuing securities through private placement. It also states the requirement of an offer document. The Directions, 2014 also talks about the offer document and specifically states that the same should contain the following - address of the Registered Office of the HFC, date of opening/ closing of the issue, maturity period, rate of interest and others. It also states that one single offer document will be valid for a period of not more than 6 months. The rules of the Act, 2013 are of course still in the draft stage and the actual text of finalised rules remains to be seen which is again round the corner.
 

Given the little room provided by the Act, 2013 to raise funds through NCDs, March 2014 Directions will hardly create any impact on the HFCs’ fund raising through NCDs, both privately and publicly. Instead of concentrating on these directions, they should be more concerned with the bigger problem that they are likely to face in terms of fund raising once the Act, 2013 gets enforced. Needless to say this is a beacon for innovative instruments.
 

(Abhirup Ghosh is research analyst at Vinod Kothari & Company)

User

On your marks, get set and GO! With the Datsun

Divya and Bapoo Malcolm spent Sunday afternoon at Nissan showroom in Worli, Mumbai to take a look at Datsun GO, the new car

Enter the Micra, Nissan’s very own wonder kid, and keep the Superman inside you on the ready. With the right side of your vision blinkered, you would need all your super hero powers to negotiate your way through traffic. The steering wheel is so much to the right that even if someone were to touch the bonnet of your car, you would not notice it.

 


Next stop, the Datsun Go was thus a big relief. Superman could go back to being Clark Kent. He got a near panoramic view of the traffic ahead and to the side. There it was, trying to woo the Indian middle class with its powder blue sheen, a la Maruti in the 1980s. And that’s what it was: an upgrade, by many notches, of the Maruti of those times.

 

It is as much endowed as lacking.  No air bags, a light body but a functional car at Rs3 lakh plus on road. Enough for mommy to go shopping for groceries. But please stick to the city in this baby. Shabana Azmi had once famously said that the Maruti is for women. So is the Go. More so.

 

Over to the macho husband…

 

The wife has had her say above. Notice the femme stuff? All colour and shopping! With Shabana to boot. For God’s sake, you are testing a car, not buying a hand-bag.

 

True, the Micra is vision impaired. The Go goes. With a 1,200 cc Renault-Nissan under the hood, it is peppy.  It handles well. The gearing ratio is good for city drives. It feels like the driver is in total control. And that’s a big plus.

 

The engine ticks over fairly smoothly. Torque at 104/4,000 is adequate. The petrol engine is said to deliver a “mileage” (or kilometrage?) of over 20 kms per litre. Maybe. But all such tests are highly controlled, so a couple of kilos here and there, in daily use, need the Nelson eye. One must remember that Nissan and Renault are co-makers of these engines. And Renault rules the roost in F1.

 

15TDIindrhd_GOw006_1600x652

 

Uphill, a small one at Worli, was a cinch. Top gear comes soon enough, a boon in consumption. Braking is adequate, what with 13 inch wheels. We were told that a 15 inches option is available. There is room enough for that and that should make it a much better car. But will there be another gear box? We have yet to know.

 

The sore point is the turn-indicators. They do not return to normal on their own. One has to flick them back, otherwise the fire alarm is nerve-racking. In this day and age? Might as well have BEST type pointer flags sticking out of the sides. Go needs to go a bit further.

 

The accelerator did not cut the engine to idling soon enough for my liking. It took a bit of time to down the revs once you raised the foot. Was told it was normal. Maybe. Seemed more like a sticky new wire or linkage. Nothing that a bit of oil or Teflon coating cannot cure.

 

In the old days, pre WWII, the gear shift was floor mounted. The fashionable stick was introduced by the French Citroen. The black, looooong cars. The lever was placed on the dashboard. And everyone raved about it. That is until bucket seats became de rigueur. So the Datsun is restarting the fashion by being a bit up-front.
 


It’s an OK car. If you think the Nano is not snobbish enough and the Swift is likely to burn a hole in the pocket, if a ‘new’ Jap brand strikes your fancy, the Go may fit the bill. But it is not a tough car. The doors and bonnets have a tinny sound. This is compromise-fatigue in action. A good engine and need for low consumption. What do you get? Less metal all round to save on weight.

 

Ah! If only we could have everything.

 

A word about the sales team. Courteous, smiling, bend-over-backward attitude. Especially a guy called Bootwalla. They listened. They replied. There was no bull. Thank Goodness Mr Bootwalla is at Nissan Worli and not at Metro Shoes. Nice kid. Far cry from the Honda team at Bori Bunder. Their motto was, “We sell Hondas. Not answer questions. Take it or leave it”. People did just that. Now Honda is playing catch-up. Sad.

 

PS. The wife said we will wait and make enough money to buy a Nissan SUV. The Terrano ------- at four times the price. Now that should do it.

 

(Bapoo Malcolm is a practising lawyer in Mumbai while Divya B Malcolm is a senior associate with Kochhar & Co. The views expressed are her own and not to be construed as legal advice.)

User

COMMENTS

sivaraman anant narayan

3 years ago

Excellent review! My wife and I did the same and felt similarly too. The one re sales guy was also an identical experience at Nerul and the take on the Honda guys couldn't be more accurate for I too left them!
narayan.

Jerin Chacko

3 years ago

This review is so enjoyable mainly because Malcolm & Co. bring their own perspective on a vehicle, different from an auto journalist's take. It felt like a regular customer's opinion, with a lawyer's eye for detail!

Sudden surge in Patidar Buildcon volumes after mass SMS. Is SEBI aware?

Last year, SEBI stopped the SMS menace of SMS Techsoft when it found the company promoters and directors using this to offload their shares. This week, there is a surge in volume in Patidar Buildcon shares after ‘intra-day tip’ SMSes. Is SEBI aware about this?

As the stock markets are touching new highs, the spurious elements have become active. Several savers, investors are receiving daily three-four SMS on their mobiles asking to 'grab' an opportunity to make a 'killing' in shares of Patidar Buildcon Ltd, in just few minutes. These SMS ‘recommend’ people to buy one to 10 lakh shares of Patidar Buildcon (BSE code 524031) for current market price (CMP) of Rs207/208, which it claims would go to Rs225-230 in just few minutes!

 

Here are the SMS that are being circulated...

 

 

Following the messages, over the past few days, there is a surge in volumes in Patidar Buildcon shares on the BSE. Especially, on 25th March, its volume witnessed a jump of over seven times to 3.87 lakh shares as against two-week average daily volume of 50,000 shares. In fact, on Tuesday, Patidar Buildcon was locked at 10% lower circuit at Rs234.55 per share. Even on Friday, it remained locked in lower circuit at Rs181.45 after falling down by 5% on the BSE.

 

Image Source: BSE


Interestingly, one particular entity Rohit Saboo is found buying Patidar Buildcon shares and again dumping it in bulk on the same day. As of February Saboo held 94,405 shares of 1.72% stake in the company. On 25th March, he bought 74,515 shares at Rs254.24 each and same day sold 1,07,096 shares at Rs256.40. He repeated the act on next two days as can be seen from below table that show all bulk deals in Patidar Buildcon throughout March 2014.

 

Image Source: BSE

 

Others like Suresh Kumar Maheshwari (HUF), Sumeet Chandak, Suman Modani and Prefer Abasan Pvt Ltd, however seems to have tried to book profit by selling Patidar Buildcon shares in bulk deals.

 

Last year in November, Market regulator Securities and Exchange Board of India (SEBI) barred 37 entities after it found various SMSs circulating in the market mentioning buy recommendation for SMS Techsoft were used by its promoters and directors to offload the company shares. SEBI had, suo moto, carried out an examination in the scrip of SMS Techsoft in view of various SMSs circulating in the market during February-March 2013 mentioning therein buy recommendation for the scrip of SMS Techsoft.

 

During the examination, SEBI said it found SMS Techsoft issued 3 crore shares to 31 entities, including three promoters, who are related to Rajesh Mangilal Ranka, that too when Ranka in 2010 was barred by the market regulator for two years.

 

Earlier in August 2013, SEBI had passed an order in a separate case where action was taken against persons luring investors through SMSes with promise of daily returns of up to Rs75,000 through mobile messages. SEBI debarred Imtiyaz Hanif Khanda and Vali Mamad Habib Ghaniwala from providing unauthorised investment advisory and portfolio management services (PMS) via SMS.

 

While in the earlier case the investors were being lured for unauthorised investment products, the SMS Techsoft case pertained to promoters of a listed company being involved as well with the spread of SMSes.

 

Coming back the case of promoting shares of Patidar Buildcon, the market regulator has yet to initiate any action. Our mail sent to SEBI remained unanswered till writing this story. We would incorporate response from the market regulator as and when we receive it.

User

COMMENTS

Deepak Raut

7 months ago

NAISARGIK AGRITECH (INDIA) LTD
(BOM:531365) done same with me right now I am having 630 shares I am in huge loss I want my money back right now company is suspended in BSE so what should I do I already registered complaint in sebi against NAISARGIK AGRITECH (INDIA) LTD
(BOM:531365)

tiwari

2 years ago

NAISARGIK AGRITECH (INDIA) LTD(BOM:531365) was one of them too..

REPLY

Deepak Raut

In Reply to tiwari 7 months ago

Hi did you take any action agains your loss

RAMIT GUPTA

2 years ago

due to this fake sms i have lost huge amt of my hard earned money..sebi has to look upon it as it is the matter of concern for so many retail investors

Bosco Menezes

2 years ago

Any reply to your mail to SEBI ?

Bosco Menezes

2 years ago

Since then same scam has repeated in (a) EMed.com Technologies .... now Rs 128 on continuous lower circuits from RS 480+ beginning from the start of June when the bulk SMS's were sent out, and also in (b) Naisargik Agritech ..... now RS 106 , on continuous lower circuits from Rs 175+ in last week of July when again the bulk SMS's went out.

vinodhkumar

3 years ago

is there any reply from SEBI.

vinodhkumar

3 years ago

i too got mad of in that SMS ,is there any point to sell that f..k stock .

REPLY

vinodhkumar

In Reply to vinodhkumar 3 years ago

any reply from SEBI........,,?

Deepak Raut

In Reply to vinodhkumar 7 months ago

Hi did you take any action agains your loss how to get money back

anil

3 years ago

Please do the needful. I am also one of the victim for the mass sms to buy Patidar Buildcon

Anand Doctor

3 years ago

I too had received numerous such messages. Thankfully, I checked the company's details on the internet and was saved from risking my money into buying these stocks.
If you try to get something for nothing, you end up getting nothing for something!
Any investor who is able to put aside the greed for quick returns for just 2 minutes, his/her own common sense will not let him/her get fooled by such tricks.

Sunil Mahajan

3 years ago

My Self Sunil Mahajan

I also recd call to buy patdar at price of 207-208 and bought 185 shares and now trading is freezed, pls provide any solution to get back our money

Vaibhav Dhoka

3 years ago

Even I got two messageswithin span of40 minutes,my number too is on DND and service provideris Idea.SEBI and TRAI should initiate action unitedly and with utmost despach

chan

3 years ago

A also received 4-5 messages although my mobile no. is registered in DND with Tata DOCOMO. Actually, those numbers registered as DND should not receive such messages. Why not take any strict action against these mobile service providers?

Viraf J Panthaky

3 years ago

Even I got 5 of them even after my being on DO NOT DISTURB with my Reliance CDMA Service provider. Disgusting, as far as 'values' are concerned in society

vinod kumar gupta

3 years ago

they will decide till the last share is sold to the retail investers then sebi will publish in news paper to stay away from such sms and after some day the company will be closed . u continue writing letters to those blind eyes or deaf ears they r there to protect the promoter not us.

REPLY

Hemant

In Reply to vinod kumar gupta 3 years ago

How can you call such persons as investors,who just wants free lunch?You have to pay price for lessons in market,nothing comes free.It is really stupid of a person,who act by just receiving such sms from unknown persons & then cry that SEBI is not working for investors,on loosing on such purely speculative trades. Unfortunately we don't apply our mind & blindly act on such messages & them blame whole world except self.

Nilesh KAMERKAR

In Reply to Hemant 3 years ago

Agree. Who can help those who are blinded by greed?

" The fool and his money are invited everywhere." - an aphorism that has been aptly put up by legendary investor Warren Buffett on his office wall.

vinod kumar gupta

In Reply to Hemant 3 years ago

infact the question is not about the investor who buy or who ignores it is the fake sms for which action is required. u diverted the issue . wat do u want to say haven't u seen the ipo of reliance power or many other issues which r now at throw away prices , there people did not reacted on fake sms but bought after lot of study and were trapped do the SEBI doesn't have responsibility on this , what action is not the issue action at right time is the problem they always react when promoter have a great time

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