Issue of Compulsory Convertible Debentures & Convertible Notes
Compulsorily Convertible Debentures (CCDs) are considered to be hybrid instruments / and equity-linked instruments, i.e. they are treated as debt till the time they are converted into equity. When they are issued it is a debt, after a while, it shall be compulsorily converted into shares. On the other hand, the Optionally Convertible Debentures are debt securities and interest is paid to the investors till maturity and repayment.
| Convertible Notes | Compulsory Convertible debentures (CCD) | |
| Pre-requisites to issue Convertible notes and compulsorily convertible debentures | Only a Private Limited company can issue | Only Private limited companies can issue |
| Minimum amount to be subscribed by 1 person should be 25 lakhs or More
|
No such condition | |
| You should be a recognized start-up by DIPP | No Such Condition | |
| Procedure to issue Convertible Notes and Convertible Debentures (CCD) | Step 1: Pass a board resolution and conduct EOGM authorizing the issue of CN. File form MGT 14
Step 2: Issue CN |
Step 1: Pass a board resolution and conduct EOGM authorizing the issue of CN. File form MGT 14
Step 2: Once the investor deposits the money file PAS 3 |
| The Obligation of Valuation report for convertible notes or exchangeable debentures | The valuation report is not required | The valuation report is not required if issued to domestic investors. Required if rose from foreign investors. |
| Which one is better – Convertible Notes or CCD | If issuing to foreign investors then Convertible notes should be preferred. | If issuing to domestic investors then CCD is the only option. |
| Option to convert | The convertible notes are convertible in equity at the option of the buyer. | These are compulsorily convertible inequity Shares. |
| The requirement of Valuation report | Valuation Report not required | Valuation report required only when issued to foreign investors |
Procedure for issuance of CCD
| Step | Particulars | What needs to be done (indicative) |
| 1. | Notice for board meeting | Issue notice to convene a meeting of the board of directors of Company as per prescribed secretarial standard 1. Assuming, there is no restriction in the AOA of the Company to hold the meeting, such meeting can be convened by giving a notice of seven days. |
| 2. | Convening meeting of Company’s board of directors | In the proposed meeting, the following action be taken:
· approving draft offer letter along with a separate list containing Proposed Allottees details, to whom the CCDs will be offered. · Open a separate bank account for receiving subscription money for further issues of CCDs. · To authorize directors of the Company to complete all filings with relevant government authorities. |
| 3 | Hold extraordinary general meeting & Filing of MGT-14 | Approving offer by the shareholders. |
| 4 | Circulate offer letter | Offer letter accompanied by an application form serially numbered and addressed specifically to Propose Allotted ones. |
| 5 | Filing of GNL -2 | According to Rule (3) of The Companies (Prospectus and Allotment of Securities) Rules, 2014, PAS-4 and record of private placement offers in PAS-5 have to be filed with the registrar of companies within thirty days of the circulation of the offer letter. |
| 6 | Convening meeting of Company board of directors after receiving of application money | · To pass the resolution for the allotment of CCDs.
· To pass the resolution for issue of letter of allotment/certificates to the allotted ones. · Authorizing two directors of the Company to sign the certificates. · Approval for filing PAS-3. · Approval for filing FC-GPR. · Approval for filing FIRC. |
| 7 | Filing with the registrar of companies | According to Rule 12 of The Companies (Prospectus and Allotment of Securities) Rules, 2014 a return of allotment in PAS-3 within thirty days of the allotment has to be filed with the registrar of companies.
Attachments: a. List of ones to be allotted b. Board resolution for allotment c. Valuation report d Copy of the special resolution passed. |
| 8 | Issue of certificate | Entry in the Company’s register of debenture holders shall be made and consequently issue the certificates to the allotted within six months from the date of allotment of CCDS. |