Issue of Corporate Debt Securities
Issue of Corporate Debt Securities
Raising finance is the most important task in setting up a business. It can be used for expanding businesses, carrying out daily operations, carrying out Mergers and Acquisitions, etc. There are many ways to raise capital. Apart from bank loans and the issue of shares to investors, capital can be raised through the issue of bonds. These bonds are also known as debt securities. When a corporation issues a bond, it is called Corporate Bond; when a Government issues the same, it is called Government Bond. This article covers the issuance of corporate debt securities.
Corporations raise capital through the issuance of publicly traded loans. These loans are also called Bonds, Notes and Debt Instruments. Investors can invest in these debt securities. The corporation that issues debt securities is called the Issuer. The people who invest in these debt securities are called Creditors. When a company issues a bond, it is taking money in the form of a loan from the investor. The company should repay this sum because it is ultimately indebted to the investor who had invested in the company by giving a loan, which is the reason that is called debt securities (as opposed to equity securities wherein the investor owns a piece of the company by holding shares). The assurance for such loans would be in the form of the goodwill and reputation of the company. Investors purchase these bonds believing that the company shall perform well in future and will repay its dues (creditworthiness of the company). Some loans are issued only on collaterals, and they are called asset-backed securities. These securities are an alternative to bonds.
Debt Service Obligation
Investors invest in debt securities for a limited period of time. This means the creditor’s issue loans to the issuer of bonds for this limited duration. The issuer has to keep paying interests until the life-term of the loan. At the end of the loan period, i.e., when the maturity period is over, the issuer has to pay the remaining balance of the principal. This whole process of issuer paying back the principal and interest is known as Debt Service Obligation.
Fixed and Floating Interest Rates
Some bonds have a fixed rate of interest, whilst others have a floating rate of interest (as determined by the issuer that offers the bonds). When a bond has a fixed rate of interest, then the payments on such interest are called coupon payments and the rate of interest is called coupon rate. The fixed rate of interest does not change and is static irrespective of the changes in market interest rates. When a bond has a floating rate of interest, then the interest rates keep changing along with the changes in market interest rates. There is another type of bond known as zero-coupon bond wherein the interest rate on such bond is literally zero till the date of maturity.
Issue by Listing of Debt Securities by Public Company
Just like shares are listed on the stock exchange, debt securities are also listed on a stock exchange. When a public company lists its debt securities on stock exchanges, it has to comply with the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations), in addition to Companies Act, 2013. The ILDS Regulations are only applicable to public issue of debt securities and Listing of debt securities through public issue or on private placement basis on a recognised stock exchange.
Process for Issue of debt securities under SEBI (ILDS) Regulations, 2008
Debt securities can be issued in the following manner:
Step 1 – file an application to one or more stock exchanges for listing of the debt securities and obtain approval
Step 2 – disclose the credit ratings, including the unaccepted credit rating from one or more credit rating agencies in the offer document made with regard to the debt securities.
Step 3 – enter into an agreement with a depository for dematerialisation of debt securities (just like shares are dematerialised for public trading) in accordance with Depositaries Act, 1996 and the relevant regulations made thereunder.
Step 4 – appoint one or more merchant bankers for letting them create debenture redemption accounts (which comes into operation when there is a default in payment) under Companies Act, 2013.
Step 5 – the draft and Final offer documents are displayed online on concerned stock exchange websites and made available for download in PDF/HTML formats
- Make an advertisement in one English daily newspaper and one Hindi daily newspaper, both with wide circulation, on or before issue opening date.
- The issuer shall decide the price and amount of Minimum subscription of debt securities in consultation with the lead merchant banker and disclose the same in the offer document.
In the case of Non-receipt of minimum subscription, all the application money received in the public issue has to be refunded.
Private Placement under SEBI (Issue and Listing of Debt Securities) Regulations, 2008
The concept of the private placement of debt securities is related to both private companies and unlisted public companies. Contrary to the listed shares on the stock exchange where the random investors make purchases of shares, the private placement of debt securities takes place when the offer documents or invitations for subscribing/purchasing debt securities are received by a selected group of persons from the issuer.
Section 42 of the Companies Act, 2013 defines ‘private placement’ as an offer of securities or invitation to subscribe securities to a selected group of persons by a company (other than by way of public offer) through the issue of a private placement offer letter and which satisfies the conditions specified in this section.
A private placement is one of the fastest ways for a company to raise capital. Listing of debt securities issued on the basis of private placement by the issuer on a recognised stock exchange happens on fulfilling the following conditions:
- The issuer has issued the debt securities in compliance with the provisions of Companies Act, 2013, rules prescribed thereunder and other applicable laws
- At least one credit rating agency registered with SEBI has issued credit rating with respect to the debt securities that are intended to be listed.
- The proposed debt securities are in dematerialised form.
- The disclosures with respect to the debt securities have been made in accordance with Regulation 21 of SEBI (ILDS) Regulations, 2008
- If the application for listing of debt securities has been made to more than one recognised stock exchanges, then the issuer should choose one of them as a designated stock exchange.
The issuer company should enter into a Listing Agreement with the stock exchange where the debt securities are sought to be listed and the former should comply with the conditions of listing in accordance with the same. The designated stock exchange collects regulatory fee from the issuer company, according to Schedule V, at the time of listing of debt securities issued on a private placement basis.
It is pertinent for companies to understand the ways in which capital can be raised. One such method is the issuance of debt securities wherein the investors invest in the company in the form of a loan which the issuer is subjected to repay as per the terms agreed. Bonds are very well-known debt securities among the public. Purchasing bonds give the investors interest along with the principal and facilitate faster disbursal of money to the company.
Companies have high creditworthiness when they have a record of returning money to their investors in time. Based on these statistics, more and more investors tend to lend money through debt securities in the belief of getting back their lent sum. The bond-holders also have a better chance than stockholders of being repaid if a company remains in default and goes into liquidation.