Chapter 10 - GUIDELINES FOR ISSUE OF CONVERTIBLE DEBT INSTRUMENTS - SEBI (Disclosure and Investor Protection Guidelines) 2000

CHAPTER X 1 (GUIDELINES FOR ISSUE OF CONVERTIBLE DEBT INSTRUMENTS) 10.0 A company offering Convertible 2 (Deleted) debt instruments through an offer document, shall comply with the following provisions in addition to the relevant provisions contained in other chapter of these guidelines. 10.1 Requirement of credit rating 10.1.1 3 (No company shall make a public issue or rights issue of 4 (Convertible Debt Instrument), unless credit rating is obtained from at least one credit rating agency registered with the Board and disclosed in the offer document.) 10.1.2 5 (Deleted) 10.1.3 6 (Where ratings are obtained from more than one credit rating agencies, all the ratings, including the unaccepted ratings, shall be disclosed in the offer document.) 10.1.4 All the credit ratings obtained during the three (3) years preceding the public or rights issue of debt 7 (Convertible Debt Instrument) for any listed security of the issuer company shall be disclosed in the offer document. 10.2 Requirement in respect of Debenture Trustee 10.2.1 8 (No company shall issue a prospectus or a letter of offer to the public for subscription of its debentures, unless the company has appointed one or more debenture trustees for such debentures in accordance with the provisions of the Companies Act, 1956.) 10.2.2 9 The names of the debenture trustees shall be stated in the Offer Documents and also in all the subsequent periodical communications sent to the debenture holders). 10.2.3 10 (A trust deed shall be executed by the issuer company in favour of the debenture trustees within three months of the closure of the issue.) 10.2.4 Trustees to the debenture issue shall be vested with the requisite powers for protecting the interest of debenture holders including a right to appoint a nominee director on the Board of the company in consultation with institutional debenture holders. 10.2.5 11 (The merchant banker shall, along with the draft offer document, file with the Board, certificates from the bankers of the Company that the assets on which the security is to be created are free from any encumbrances and the necessary permissions to mortgage the assets have been obtained or No-objection Certificate from the Financial Institutions or Banks for a second or pari passu charged in cases where assets are encumbered. The merchant banker shall also ensure that the security created is adequate to ensure 100% asset cover for the debentures.) 12 (Provided that in case of a fast track issue of debt instruments, the certificate specified in this clause shall not be filed with SEBI.) 10.2.6 The debenture trustee shall ensure compliance of the following: a) 33 (It shall obtain reports from the lead bank, regarding monitoring progress of the project.) b) 14 (It shall monitor utilization of funds raised in the debenture issue.) c) Trustees shall obtain a certificate from the company s auditors: (i) in respect of utilisation of funds during the implementation period of projects. (ii) in the case of debentures for working capital, certificate shall be obtained at the end of each accounting year. d) Debenture issues by companies belonging to the groups for financing replenishing funds or acquiring share holding in other companies shall not be permitted. Explanation: The expression `replenishing of funds or acquiring shares in other companies shall mean replenishment of funds or acquiring share holdings of other companies in the same group. In other words, the company shall not issue debentures for acquisition of shares / providing loan to any company belonging to the same group. However, the company may issue equity shares for purposes of repayment of loan to or investment in companies belonging to the same group. e) The debenture trustees shall supervise the implementation of the conditions regarding creation of security for the debentures and debenture redemption reserve. 10.3 Creation of Debenture Redemption Reserve (DRR) 15 (10.3.1 For the redemption of the debentures issued, the company shall create debenture redemption reserve in accordance with the provisions of the Companies Act, 1956.) 10.4 Distribution of Dividends (a) 16 (In case of the companies which have defaulted in payment of interest on debentures or redemption of debentures or in creation of security as per the terms of issue of the debentures, any distribution of dividend shall require approval of the Debenture Trustees and the Lead Institution, if any.) (b) In the case of existing companies prior permission of the lead institution for declaring dividend exceeding 20% or as per the loan covenants is necessary if the company does not comply with institutional condition regarding interest and debt service coverage ratio. (c) (i) Dividends may be distributed out of profit of particular years only after transfer of requisite amount in DRR. (ii) If residual profits after transfer to DRR are inadequate to distribute reasonable dividends, company may distribute dividend out of general reserve. 10.5 Redemption 10.5.1 The issuer company shall redeem the debentures as per the offer document. 10.6 17 (Disclosure and) Creation of Charge 18 (10.6.1 The offer document shall specifically state the assets on which security shall be created and shall also state the ranking of the charge/s. In case of second or residual charge or subordinated obligation, the offer document shall clearly state the risks associated with such subsequent charge. The relevant consent for creation of security such as pari passu letter, consent of the lessor of the land in case of leasehold land etc. shall be obtained and submitted to the debenture trustee before opening of issue of debenture.) 19 (10.6.2 The offer document shall state the security / asset cover to be maintained. The basis for computation of the security / asset cover, the valuation methods and periodicity of such valuation shall also be disclosed. The security / asset cover shall be arrived at after reduction of the liabilities having a first / prior charge, in case the debentures are secured by a second or subsequent charge.) 10.6.3 20 (Deleted). 21 (10.6.4 The issue proceeds shall be kept in an escrow account until the documents for creation of security as stated in the offer document, are executed.) 22 (10.6.5) 23 (Deleted) 24 (10.6.6) The proposal to create a charge or otherwise in respect of such debentures, may be disclosed in the offer document along with its implications. 10.7 Requirement of letter of option 10.7.1 25 (Where the company desires to rollover the debentures issued by it, it shall file with SEBI a copy of the notice of the resolution to be sent to the debenture-holders for the purpose, through a merchant banker prior to dispatching the same to the debenture-holders. The notice shall contain disclosures with regard to credit rating, necessity for debenture-holders resolution and such other terms which SEBI may specify. Where the company desires to convert the debentures into equity shares in accordance with clause 10.7.2, it shall file with SEBI a copy of the letter of option to be sent to debenture-holders with the Board, through a merchant banker, prior to dispatching the same to the debenture-holders. The letter of option shall contain disclosures with regard to option for conversion, justification for conversion price and such other terms which SEBI may specify.) 10.7.1.1 26 (Roll over of Non Convertible Portions of Partly Convertible Debentures (PCDs) 27 (Deleted) by company not being in default. The non-convertible portions of PCDs 28 (Deleted) issued by a listed company, the value of which exceeds 50 lacs, can be rolled over without change in the interest rate subject to section 121 of the Companies Act, 1956 and subject to the following conditions, if the company is not in default: (a) A resolution to this effect is passed by postal ballot, having the assent from not less than 75% of the debenture-holders. (b) The company shall redeem the debentures of all the dissenting debenture holders, who have not assented to the resolution. (c) 29 (Before roll over of any 30 (Deleted) non-convertible portion of the PCDs, at least one rating shall be obtained from a credit rating agency registered with the Board within a period of six months prior to the due date of redemption and communicated to the debenture holders before the roll over.) (d) Fresh trust deed shall be executed at the time of such roll over. (e) Fresh security shall be created in respect of such debentures to be rolled over. Provided that if the existing trust deed or the security documents provide for continuance of the security till redemption of debentures, fresh trust deed or fresh security need not be created.) 31 (10.7.1.1A Roll over of Non Convertible portions of Partly Convertible Debentures (PCDs) 32 (Deleted) by the company being in default. The non-convertible portions of PCDs 33 (Deleted) issued by a listed company, the value of which exceeds 50 lacs, can be rolled over without change in the interest rate subject to section 121 of the Companies Act, 1956 and subject to the following conditions, where the company is in default: (a) A resolution to this effect is passed by postal ballot, having the assent from not less than 75% of the debenture-holders. (b) The company shall send an Auditors certificate on the cash flow of the company with comments on the liquidity position of the company to all debenture holders, along with the notice for passing the said resolution. (c) The company shall redeem the debentures of all the dissenting debenture holders, who have not assented to the resolution. (d) The debenture trustee shall decide on whether the company is required to create fresh security and execute fresh trust deed in respect of such debentures to be rolled over Provided that if the existing trust deed or the security documents provide for continuance of the security till redemption of debentures, fresh security and fresh trust deed need not be created. 10.7.1.2 In case of conversion of instruments (PCDs/FCDs,etc.) into equity capital i) In case, the convertible portion of any instrument such as PCDs, FCDs etc. issued by a listed company, value of which exceeds 50 Lacs and whose conversion price was not fixed at the time of issue, holders of such instruments shall be given a compulsory option of not converting into equity capital. ii) Conversion shall be done only in cases where instrument holders have sent their positive consent and not on the basis of the non-receipt of their negative reply. Provided that where issues are made and cap price with justification thereon, is fixed beforehand in respect of any instruments by the issuer and disclosed to the investors before issue, it will not be necessary to give option to the instrument holder for converting the instruments into equity capital within the cap price. iii) In cases where an option is to be given to such instrument holders and if any instrument holder does not exercise the option to convert the debentures into equity at a price determined in the general meeting of the shareholders, the company shall redeem that part of debenture at a price which shall not be less than its face value, within one month from the last date by which option is to be exercised. iv) The provision of sub-clause (iii) above shall not apply if such redemption is to be made in accordance with the terms of the issue originally stated. 10.7.1.3 34 (The debenture trustee shall submit a certificate of compliance with clauses 10.7.1.1, 10.7.1.1A or 10.7.1.2, as the case may be, to the merchant banker which shall be filed with the Board within 15 days of the closure of the rollover or conversion.) 35 (10.7.2 Companies may issue unsecured/ subordinated debt instruments/ obligations (which are not public deposits as per the provisions of Section 58 A of the Companies Act, 1956 or such other notifications, guidelines, Circular etc. issued by RBI, DCA or other authorities). Provided that such issue shall be subscribed by Qualified Institutional Buyers or other investor who has given positive consent for subscribing to such unsecured / sub-ordinated debt instruments/ obligation.) 10.8 Other requirements 10.8.1 36 (Deleted) 10.8.2 37 (Deleted) 10.8.3 (a) No issue of debentures by an issuer company shall be made for acquisition of shares or providing loan to any company belonging to the same group. Sub-clause (a) shall not apply to the issue of fully convertible debentures providing conversion within a period of eighteen months. 10.8.4 Premium amount and time of conversion shall be determined by the issuer company and disclosed. 10.8.5 The interest rate for debentures can be freely determined by the issuer company. 10.9 Additional Disclosures in respect of debentures The offer document shall contain: (a) Premium amount on conversion, time of conversion. (b) In case of 38 (Deleted) 39 (PCDs) redemption amount, period of maturity, yield on redemption of the 40 (Deleted) 41 (PCDs). (c) Full information relating to the terms of offer or purchase including the name(s) of the party offering to purchase the khokhas (non-convertible portion of 42 (Deleted)). (d) The discount at which such offer is made and the effective price for the investor as a result of such discount. (e) The existing and future equity and long term debt ratio. (f) Servicing behaviour on existing debentures, payment of due interest on due dates on term loans and debentures. (g) That the certificate from a financial institution or bankers about their no objection for a second or pari passu charge being created in favour of the trustees to the proposed debenture issues has been obtained. ********* 1 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008 for the following Guidelines for Issue of Debt Instruments 2 Omitted the words / Non Convertible vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. 3 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/29/2007/03/12 dated December 3, 2007 for the following: No company shall make a public issue or rights issue of debt instruments (whether convertible or not), unless credit rating of not less than investment grade is obtained from not less than two registered credit rating agencies and disclosed in the offer document. Prior to the above, clause 10.1.1 was substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: No public or rights issue of debt instruments (including convertible instruments) in respect of their maturity or conversion period shall be made unless credit rating from a credit rating agency has been obtained and disclosed in the offer document. 4 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008 for the words debt instruments (whether convertible or not) . 5 Omitted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: a public / rights issue of debt security of issue greater than or equal to 100 crores two ratings from two different credit rating agencies shall be obtained. 6 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/29/2007/03/12 dated December 3, 2007 for the following: Where credit ratings are obtained from more than two credit rating agencies, all the credit rating/s, including the unaccepted credit ratings, shall be disclosed. Prior to the above, clause 10.1.3 was substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: Where credit rating is obtained from more than one credit rating agencies, all the credit rating/s, including the unaccepted credit ratings, shall be disclosed. 7 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008 for the words debt instruments (including convertible instruments) . 8 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: In case of issue of debenture with maturity of more than 18 months, the issuer shall appoint a Debenture Trustee. 9 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: The names of the debenture trustees must be stated in the offer document . 10 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: A trust deed shall be executed by the issuer company in favour of the debenture trustees within six months of the closure of the issue. 11 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: The merchant banker shall, along with draft offer document, file with Board, certificates from their bankers that the assets on which security is to be created are free from any encumbrances and the necessary permissions to mortgage the assets have been obtained or a No Objection Certificate from the financial institutions or banks for a second or pari passu charge in cases where assets are encumbered. 12 Inserted proviso, vide SEBI Circular No. SEBI/CFD/DIL/DIP/28/2007/29/11 dated November 29, 2007. 13 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: Lead financial institution / investment institution shall monitor the progress in respect of debentures raised for project finance / modernisation / expansion / diversification / normal capital expenditure. 14 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: The lead bank for the Company shall monitor debentures raised for working capital funds. 15 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: 10.3.1 A company has to create DRR in case of issue of debenture with maturity of more than 18 months. 10.3.2 The issuer shall create DRR in accordance with the provisions given below, (a) If debentures are issued for project finance for DRR can be created upto the date of commercial production. (b) The DRR in respect of debentures issued for project finance may be created either in equal instalments or higher amounts if profits so permit. (c) In the case of partly convertible debentures, DRR shall be created in respect of non-convertible portion of debenture issue on the same lines as applicable for fully non-convertible debenture issue. (d) In respect of convertible issues by new companies, the creation of DRR shall commence from the year the company earns profits for the remaining life of debentures. (e) DRR shall be treated as a part of General Reserve for consideration of bonus issue proposals and for price fixation related to post tax return. (f) Company shall create DRR equivalent to 50% of the amount of debenture issue before debenture redemption commences. (g) Drawl from DRR is permissible only after 10% of the debenture liability has actually been redeemed by the company. (h) The requirement of creation of a DRR shall not be applicable in case of issue of debt instruments by infrastructure companies. 16 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: In case of new companies, distribution of dividend shall require approval of the trustees to the issue and the lead institution, if any. 17 Inserted vide SEBI Circular No. DIP (Compendium) Circular No. 4 dated September 06, 2000. 18 Inserted vide SEBI Circular No. DIP (Compendium) Circular No. 4 dated September 06, 2000. 19 Inserted vide SEBI Circular No. DIP (Compendium) Circular No. 4 dated September 06, 2000. 20 Deleted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 the following: The security shall be created within six months from the date of issue of debentures. Provided that if for any reasons the company fails to create security within 12 months from the date of issue of debentures the company shall be liable to pay 2% penal interest to debenture holders. Provided further that if security is not created even after 18 months, a meeting of the debenture holders shall be called within 21 days to explain the reasons thereof and the date by which the security shall be created). The above clause, initially numbered as 10.6.1, was renumbered as 10.6.3, vide SEBI Circular No. DIP (Compendium) Circular No. 4 dated September 06, 2000. 21 Inserted vide SEBI Circular No. DIP (Compendium) Circular No. 4 dated September 06, 2000. 22 Renumbered Clause no. 10.6.2 as 10.6.5, vide SEBI Circular No. DIP (Compendium) Circular No. 4 dated September 06, 2000. 23 Omitted the renumbered clause 10.6.5 and its proviso, vide SEBI Circular No. SEBI/CFD/DIL/DIP/29/2007/ 03/12 dated December 3, 2007 for the following: If the issuing company proposes to create a charge for debentures of maturity of less than 18 months, it shall file with Registrar of Companies particulars of charge under the Companies Act. Provided that, where no charge is to be created on such debentures, the issuer company shall ensure compliance with the provisions of the Companies (Acceptance of Deposits) Rules, 1975, as, unsecured debentures / bonds are treated as deposits for purposes of these rules. 24 Renumbered Clause no. 10.6.3 as 10.6.6 vide SEBI Circular No. DIP (Compendium) Circular No. 4 dated September 06, 2000. 25 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: 10.7.1 Filing of letter of option A letter of option containing disclosures with regard to credit rating, debenture holder resolution, option for conversion, justification for conversion price and such other terms which the Board may prescribe from time to time shall be filed with the Board through an eligible Merchant Banker, in the following cases: 26 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: In case of Roll over of Non Convertible portions of Partly Convertible Debentures(PCDs)/ Non Convertible Debentures (NCDs). i) In case, the non-convertible portions of PCD/NCD issued by a listed company, value of which exceeds 50 lacs, can be rolled over without change in the interest rate subject to the following conditions: (a) An option shall be compulsorily given to debenture holders to redeem the debentures as per the terms of the offer document. (b) Roll over shall be done only in cases where debenture holders have sent their positive consent and not on the basis of the non-receipt of their negative reply. (c) Before roll over of any NCDs or non-convertible portion of the PCDs, a fresh credit rating shall be obtained within a period of six months prior to the due date of redemption and communicated to debenture holders before roll over. (d) Fresh trust deed shall be executed at the time of such roll over. (e) Fresh security shall be created in respect of such debentures to be rolled over. Provided that if the existing trust deed or the security documents provide for continuance of the security till redemption of debentures fresh security may not be created. 27 Omitted the words / Non Convertible Debntures (NCDs), vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/ 2008/28/08 dated August 28, 2008. 28 Omitted the words or the NCDs vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009. 29 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/29/2007/03/12 dated December 3, 2007 for the following: Before roll over of any NCDs or non-convertible portion of the PCDs, at least two credit ratings of not less than investment grade, shall be obtained within a period of six months prior to the due date of redemption and communicated to debenture holders before roll over. 30 Omitted the words NCDs or vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009. 31 Inserted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003. 32 Omitted the words / Non Convertible Debntures (NCDs), vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/ 2008/28/08 dated August 28, 2008. 33 Omitted the words and the NCDs vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. 34 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following: In case of Conversion of Debentures Issued under Consent of Controller of Capital Issues (CCI) A) In case, the value of convertible portion of any instrument such as PCDs, FCDs, etc. issued by a listed company exceeds 50 Lacs and; i) where in terms of the consent issued by the Controller of Capital Issues, the price of conversion of PCDs / FCDs is to be determined at a later date by the Controller, such price and the timing of conversion shall be determined at a general meeting of the shareholders subject to - a) the consent of the holders of PCDs / FCDs for the conversion terms shall be obtained individually and conversion will be given effect to only if the concerned debentureholders send their positive consent and not on the basis of non- receipt of their negative reply; and b) such holders of debentures, who do not give such consent, shall be given an option to get the convertible portion of debentures redeemed or repurchased by the company at a price, which shall not be less than face value of the debentures. c) where the consent from the Controller of Capital Issues stipulates cap price for conversion of FCDs / PCDs, the board of the Company may determine the price at which the debentures may be converted. Provided that options to debentures / other instrument holders for conversion into equity not required where the consent from the Controller of Capital Issues stipulates cap price for conversion of FCDs and PCDs and the cap price has been disclosed to the investors before subscription is made. ii) In case of issue of debentures fully or partly convertible made in the past, where the conversion was to be made at a price to be determined by the CCI at a later date, the price of conversion and time of conversion shall be determined by the issuer company in a meeting of the debenture holders, subject to the following: The decision in the said meeting of debenture holders may be ratified by the shareholders in their meeting. Such conversions shall be optional for acceptance on the part of individuals debenture holders. The dissenting debenture holders shall have the right to continue as debenture holders if the terms of conversions are not acceptable to them. iii) Where issue of PCDs and FCDs is made pursuant to the consent given by the Controller of Capital Issues and the consent specifies the timing of conversion but the price of conversion of PCDs / FCDs is to be determined at a later date, the following shall be complied with:- a) the consent of the shareholders is to be obtained only for the purposes of fixing the price of conversion and not for the pre-poning and postponing the timing of the conversion approved by CCI. b) The conversion price shall be reasonable (in comparison with previous conversion price where the terms of the issue provide for more than one conversion) and the conversion price shall not exceed the face value of that part of the convertible debenture which is sought to be converted. c) In cases where an option is to be given to the debentureholders and, if any debentureholder does not exercise the option to convert the debentures into equity at a price determined in the general meeting of the shareholders, the company shall redeem that part of debenture at a price which shall not be less than its face value within one month from the last date by which option is to be exercised. d) The provision in sub-clause (c) above shall not be applicable in case such redemption is to be made in accordance with the original terms of the offer. In cases of issues of debentures fully or partly convertible, irrespective of value made in the past, where conversion was to be made at a price to be determined by CCI and the consent order does not provide for a specific premium or a cap price for conversion, the draft letter of option to the debentureholders filed with the Board shall contain justification for the conversion price. 35 Inserted vide SEBI Circular No. DIP (Compendium) Circular No. 4 dated September 06, 2000. 36 Omitted clause, vide SEBI/CFD/DIL/DIP/29/2007/03/12 dated December 3, 2007 for the following: No company shall issue of FCDs having a conversion period of more than 36 months, unless conversion is made optional with put and call option. 37 Omitted clause, vide SEBI/CFD/DIL/DIP/29/2007/03/12 dated December 3, 2007 for the following: If the conversion takes place at or after 18 months from the date of allotment, but before 36 months, any conversion in part or whole of the debenture shall be optional at the hands of the debenture holder. 38 Omitted the words PCDs vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. 39 Substituted the word and punctuation mark NCDs, , vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009. 40 Omitted the words PCDs vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. 41 Substituted the word and punctuation mark / NCDs , vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009. 42 Omitted the words PCDs vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008.