[Opinion] Non-Convertible Debentures – Tax & Company Law Aspects

CA Rohan Sogani & Samriddhi Todi – [2024] 169 taxmann.com 581 (Article)

In the ever-evolving landscape of financial instruments, for investors seeking stability, debentures are the lucrative option. It is generally used by companies to raise long-term funds from the public. There are many types of debentures such as debentures based on security (secured or unsecured), convertibility (fully convertible or partially convertible), redemption (redeemable or irredeemable), zero coupon debentures etc. but for companies aiming to secure capital without diluting equity, Non-Convertible Debentures (NCDs) present an attractive option.

NCDs are fixed income instruments which are not convertible to equity shares of the issuing company and are generally redeemed after the expiry of specified period. Thus, NCD is an instrument of debt executed by the company, acknowledging its obligation to repay the sum along with specified rate of interest.

1. Types of NCDs

NCDs are broadly categorized in two types-

1.1 Secured NCDs

Secured NCDs are debt securities that are backed by collateral, offering a certain level of repayment guarantee. Investments in secured NCDs are considered safer and more reliable because they are backed by the company’s assets. In the event of a default, the investor’s funds can be recovered through the liquidation of these assets.The company is obligated to sell the assets that serve as collateral for the NCDs and pay out the investors.

1.2 Unsecured NCDs

Unsecured NCDs are unsecured debt instruments. As the name “unsecured” implies, these NCDs have comparatively higher risk as they are not backed or secured by assets/collateral. The extent of risk and safety of unsecured NCD is based on the creditworthiness of the issuer as these are not backed by any assets or collateral. Unsecured debt instruments typically offer a higher return than their secured counterparts.

2. NCDs for Private Limited Company

Can a private limited company issue NCDs?

Yes, a company can issue NCDs through private placement as per Section 42 of the Companies Act, 2013. It cannot issue such NCDs to the public.

Moreover, the offer cannot be made to more than 200 persons in aggregate in a financial year, excluding qualified institutional buyers and employees under ESOP.

Click Here To Read The Full Article