Issue of debentures: Whether approval under section 180(1)(c) only to refer or any other compliance required

The relevance of debt market in India and the need for companies to reduce dependence on bank loans and move to capital markets cannot be overemphasized. There have been enormous policy statements on this and in fact, SEBI has mandated large companies to move at least a part of incremental borrowings to bonds. The penetration of bond issuance to debt is quite low in India compared to other emerging markets.

In light of all this, it will be unfortunate if interpretation of compliances under Section 42 of Companies Act, 2013 for debt issues is such as to make it impractical for companies to issue debt. For financial companies private placement of debt is almost the way of life. Many of them issue bonds on weekly basis.

The Companies Act 2013 (Act) contains provisions relating to the issue of debt by companies by way of private placement. The relevant provisions of Section 42 read with Rule 14 of Companies (Prospectus and Allotment of Securities) 2014 (PAS Rules) specify the compliances to be ensured by a company privately placing debentures.

Rule 14 of PAS Rules

One of the requirement under Rule 14 of PAS Rules mandates companies to pass Special resolution prior to making private placement of securities. 

There is a carve out in case of private placement of Non-Convertible Debentures (NCDs) if the proposed amount to be raised does not exceed the limit as specified in Section 180(1)(c) and in such case relevant Board resolution would be adequate. 

Resulting interpretation 

The aforesaid provision has resulted in two opinions: 

Interpretation 1: Prior approval of shareholders is not required if the issuance of NCDs is within the limit approved by shareholders under Section 180 (1) (c) of Act, 2013. 

Interpretation 2: Prior approval of shareholders is required, [irrespective of the limit approved by the shareholders under Section 180 (1) (c)], if the issuance of NCDs is in excess of the sum of paid-up capital, free reserves and securities premium account, being the limit specified in Section 180 (1) (c).

Intent of Law

Before analyzing the aforesaid interpretations it is necessary to assess the intent of law behind the current amendment.

Relevant extract of recommendations of Company Law Committee

3.8 At the moment, in case of non-convertible debentures a prior special resolution only once in a year has been prescribed. The Committee recommends that since Non-Convertible Debentures are pure borrowings and do not form part of equity capital, the proviso to Rule 14(2)(a) may be amended to prescribe that the relevant board resolution under Section 179(3)(c) would be adequate in case the offer under Section 42 is for debentures up to the borrowing limits permissible for Board under section 180(1)(c) of the Act. This would also align the requirements with that of section 180(1)(c). It was, however, felt that the said Board resolution should clearly mention (in the body of the resolution) that the offer of debentures being approved by Board is through private placement under Section 42 and certain other minimum details as may be prescribed in the rules be provided in the Board resolution.

Relevant provisions of Section 180 (1) (c) of Act, 2013 

180. (1) The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely:— xxxxx 

(c) to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

Analysis of both interpretation

The intent of the law is to provide for a simple and robust mechanism for the issue of non-convertible debentures as is seen in the report of the Company Law Committee and to amend the erstwhile provisions in order to align the same with the requirements of Section 180(1)(c). 

Accordingly, there should be no requirement to approach the shareholders again if the borrowing is within the permissible limit approved by the shareholders. Typically, a shareholder’s resolution passed under Section 180 (1) (c) provides following consent: 

“xxxxx consent of the members of the Company be and is hereby accorded to the Board of directors or to such persons or such committee (by whatever name called), as may be authorised by the Board in this regard, to borrow at any time or from time to time by obtaining loans, overdraft facility, lines of credit, commercial papers, non-convertible debentures, external commercial borrowings (loans/bonds), INR denominated off shore bonds or in any other forms from banks, financial institutions, insurance companies, mutual funds, or other corporates or other eligible investors, including by way of availing credit limits through non fund based limits i.e. bank guarantee, letter of credit, etc. or by any other means as deemed fit by it, against the security of term deposits, movables, immovables or such assets as may be required or as unsecured, at any time or from time to time, any sum or sums of money (ies) which together with monies already borrowed by the Company (apart from temporary loans obtained or to be obtained from the Company’s bankers in the ordinary course of business), exceeding the aggregate of paid-up share capital of the Company, its free reserves and securities premium, provided that the total amount so borrowed by the Board shall not at any time exceed Rs. ** (Rupees in words)”  

If we go with Interpretation no 2, despite clear approval from shareholders for an overall limit, companies will be required to approach shareholders every year for private placement of NCD if the proposed amount exceeds the aggregate of paid-up share capital of the Company, its free reserves and securities premium. Certain companies are also taking up approval of shareholders in the ensuing AGM to foolproof the gap in the language. [Refer Bajaj Finance's AGM Notice, resolution no. 13]

The text of the resolution provides for approval of shareholders for a period of one year to permit Board to privately place NCDs within the overall borrowing limits approved by the members from time to time under section 180(1)(c) of the Act. 

In certain cases, companies have approached shareholders seeking approval for specific limit. Refer Notice 1 & Notice 2.

The approach not only seems counter intuitive but also defies the amendments specifically which were made for the purpose of easing the compliance by companies and to promote debt issues by them. A company could publicly issue NCDs with the approval under Section 180(1)(c), however, will be required to specifically approach shareholders in case of private placement if it exceeds the limit specified in the said section.

On the contrary, first interpretation backs the intent provided in the Company Law Committee Report that the companies can raise debentures upto borrowing limits permissible to the Board under Section 180 (1) (c). As per provisions of the said section the Board is authorised to borrow beyond aggregate of paid-up share capital of the Company, its free reserves and securities premium upto the limit approved by the shareholders from time to time.

Conclusion

If proposed issuance of NCDs is within the borrowing limit approved by shareholders under Section 180 (1) (c) from time to time, separate approval of shareholders pursuant to Rule 14 of PAS Rules is not required. The other interpretation frustrates the purpose of the amendment.