There are various instruments through which companies can raise capital from the investors and the public at large. While equity shares and debentures rank amongst the most popular instruments, the Companies Act, 2013 also authorises other lucrative instruments like Optionally Convertible Debentures (OCDs) for raising capital. Let’s see what are Optionally Convertible Debentures and how can companies issue Optionally Convertible Debentures.
What are Optionally Convertible Debentures?
As the name suggests, optionally convertible debentures are primarily the debt instruments that allow companies to raise capital from investors by initially issuing debentures as debt instruments. However, these debentures are not normal debentures as the investors have the option to convert these debentures into shares in the future. The price at which the debentures will get converted into equity shares can either be decided at the time of issue or decided at the time of conversion. Till the debentures are converted into equity shares or they achieve maturity, the investors receive interest as per the terms of issue of the debentures.
Legal Provisions Surrounding Issue of Optionally Convertible Debentures
Following are some of the legal provisions for issue of optionally convertible debentures as highlighted under the Companies Act, 2013:
- Section 71: This section deals with all the aspects relating to the issue of debentures by the companies. It specifies all the terms and conditions, debenture trust deed, manner of issuance of debentures, creation of charge etc.
- Section 73: This section specifies the provisions relating to the acceptance of deposits by the companies. As per this section, the debentures issued by the companies should not be regarded as deposits if they satisfy the prescribed terms and conditions specified in the act.
- Section 117: This section lays down the requirements for filing the resolutions and agreements with the Registrar of Companies (ROC). Any agreement or resolution passed by the company for the issue of debentures shall be filed with the ROC within the time specified under the Companies Act.
Apart from the above sections, the following rules also become applicable in case of the issue of optionally convertible debentures:
- Companies (Share Capital and Debentures) Rules, 2014: These rules lay down the detailed rules and guidelines relating to the issue of debentures, creation of charges, valuation of assets, trust deeds, appointment of debenture trustees, terms and conditions of issue of debentures etc.
- Companies (Registration of Charges) Rules, 2014: These rules lay down the rules and guidelines relating to the creation of charges under the company law. It also specifies the procedure and duration for the creation of a charge on the issue of debentures.
Process of Issuing Optionally Convertible Debentures
Here’s the detailed process for issuing optionally convertible debentures in India:-
- Board Resolution: The company needs to pass a board resolution approving the issue of optionally convertible debentures. It should also determine the terms and conditions, issue size and amount of optionally convertible debentures to be issued.
- Shareholder Approval: After passing of the board resolution, approval of shareholders should be obtained by passing a special resolution in the general meeting of the company. The resolution should also specify all the details regarding the issue of optionally convertible debentures.
- Valuation of Debentures: Companies need to carry out the valuation of their shares to determine the price at which the debentures will be converted into equity shares in the future. The conversion price should be determined by a registered valuer.
- Offer Letter: The company must prepare an offer letter stating the terms and conditions of the issue of debentures along with an application form. Investors interested in applying for the issue can apply for the same by submitting the duly filled-in application form along with the payment of applicable fees.
- Allotment of Debentures: The companies must allot the optionally convertible debentures within 60 days of receipt of the application money. In case the debentures are to be listed on any recognised stock exchange, then the listing should be done as per the guidelines of SEBI.
Benefit of Optionally Convertible Debentures
Optionally convertible debentures are a welcome instrument for both the companies and the investors at large. Here are some of the key benefits of optionally convertible debentures for both the stakeholders:
Benefit for Companies: The preservation of ownership is an important aspect for most founders and promoters. Optionally convertible debentures allow existing shareholders to issue further capital without diluting the equity. During funding winter, optionally convertible debentures come in handy as companies can raise capital through debt and dilute equity in the future when the valuations go high and market conditions improve.
Benefit for Investors: Optionally convertible debentures benefit investors alike as they reduce their overall investment risk. The option to convert debentures lies with the investors. Therefore, if they find an investment risky, they can go ahead with OCDs whereby they can hold their stake as debt investment. If they find the environment conducive or feel that the company has become stable and has good growth prospects, they can convert their stake into equity as per the terms of the issue.
Following are the complete details relating to the issue of optionally convertible debentures in India. For more information and assistance, feel free to contact the ASC Group.
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