BONDS

BONDS
Private placement (Less than 50 investors) Public placement (More than 49 investors)

BONDS

The timeframe from when the decision to issue bonds and the actual issuance then further to Complete Servicing of Bonds till its repayment is a complete process of evolution. The Bond from being just in papers at the initial stage to actual issuance (birth) and the ultimate repayment of bonds (death) could be compared to the life frame of a Living being. After each step is achieved the Bond is a step closer to the actual existence from being just in papers and then once the debt servicing starts taking place the end life term of the bonds starts reducing leading to ultimate repayment at the maturity. The Bonds can be placed publicly or privately, in both the cases the activities to be accomplished remains the same; only the magnitude of work in each of the activities would differ, In case of Public Placement the firm has to incur higher costs and time. A firm would decide to go for a Public placement only when the firm wants to build repute in the Public domain and the market at large. A well established firm would have many avenues which would fetch the same amount that the public placement would fetch but the time and costs incurred by the firm would be meager. For NTPC Ltd, which has issued Four (4) public placements and the total number of placements as on 04/07/2011 stands as Thirty Nine (39); signifying that the firm is able to sell its bonds privately at more instances thereby negating the need for Public Placements. Usually, NTPC Ltd. gets into an agreement with a Corporate, Fund Agency, Government Agencies etc. for issuance of a set amount within a time tenure

and these agencies would purchase these debt instruments; this reduces the effort required to set out and find a prospective buyer for the Bonds. Moreover most of these agencies look for an Investment avenue which is safe rather than looking for the Interest income that would be fetched by the investment. For Example, NTPC Ltd. has a Memorandum of Understanding with Army Group Insurance Fund (AGIF) for Issuing Rs. 1200 Cr. Bonds within 3 years from March 2010 The Bond Progression in it includes the complete activities, procedures and steps that are required to be followed in the appropriate evolution of the Bonds.

Activity Schedule for Domestic Bond Issue on Private Placement Basis

An indicative activity chart for Domestic Bond Issue is given as under: No 1. 2 3. 4. 5. 6. 7. 9. Activity Board resolution authorizing issue of bonds and delegation of powers to other Senior Officers Under Section 292 of the Companies Act,1956 Approval of Shareholders for raising debt exceeding limits of paid up capital + Free Reserves Section 293 of the Companies Act,1956 Preparation of Disclosure Document as per SEBI Regulations,2008 Obtaining Credit Ratings through Budget * Administrative Approval for raising a particular Series of Bonds Appointment of Banker, Registrars and Trustee Application to the stock exchange(s) for seeking in-principle consent for listing of the Bonds Seeking other Approvals such as authorizing Officers for execution of Agreements/ Member of the Committee for allocation of Bonds

10. Tripartite Agreement (i) NSDL-Issuer- Registrars and (ii) CDSL-Issuer-Registrars 11. Marketing Activities for Bonds Inviting bids from multiple potential investors/one-onone deal 12. Finalization coupon rate/forwarding documents to short listed investors intimating the pay-in-date 13. Application to Depositories for issuing International Security Identification Number (ISIN) - Receipt of ISIN from Depositories

14. Pay-in-Date 15. Approval of Sub-Committee of the Board for allotment of Bonds 16. Approval for payment of Corporate Action Fee and Corporate Action by Depositories & RTA for credit of Bonds on due date of allotment. 17. Listing activities approval for payment of fee/signing of listing agreement and forwarding the documents to Stock Exchange for Listing of Bonds. 18. Security / Charge creation activities ( approvals for identified assets, fee, documents etc) 20. Signing of Bond Trust Deed/Registration/ Mortgaging 21 22 Filing of Form 10 with ROC and Receipt of Certificate of Charge creation. Corporate Action for change of description of Securities from LOA to Bonds *explained in detail, ahead in the report

The above 22 steps have been classified and compressed into 8 Prime Steps: 1) Approvals under Co. Act 2) Delegation Of power 3) Credit Rating 4) Appointment of Intermediaries 5) Disclosure Documents 6) Issuance 7) Listing 8) Security Creation

The firm has to appoint Registrar and Transfer Agent, Trustee, Banker etc. These intermediaries specialize in their respective work area and are inevitable part in the

bond issuance process. The Issue of Bonds mandatory requires a Credit Rating from at least one Credit Rating Agency which is recognized by the Securities and Exchange Board of India. Once the initial hurdles are overcome then the firm could go into the preparation of the Disclosure Document as per SEBI: Issue and Listing of Debt Securities Regulations, 2008. The Disclosure Document in it would specify about the Current Bond Issue, Previous Bond Issues which are yet to be matured, History and background of the Firm, Management of the Firm, the Financial Structure of the firm, the Operational performance of the firm. The firm Issuing the bonds be it on Public or Private Placement have an option to list their bonds in the Stock Exchange, in the initial phase an In-principle Consent is sought from the Stock Exchange and the actual listing takes place once the payment is made by the Investor and all the listing Requirements are met. The actual Issuance takes place when the firm receives the Funds from the Investor (Pay-in Date) and the Security for the Bonds is created and the Letter of Allotment is turned into actual Bonds.

Description of Prime Steps

I) Approvals under The Companies Act, 1956

The firm should get a resolution passed by the Board of Directors for raising funds through Debt Instruments as well for the Delegation of Power to Senior Officers from the Board of Directors (U/s 292, refer the Acts and Enactments Chapter); this is a mandatory step irrespective of the size, technique of placement, coupon rate and other variables.

The firm raising Debt be exceeding the aggregate of the Paid Up Capital of the company and Free Reserves, the firm would have pass a special resolution in the Annual General Meeting (U/s 293, refer the Acts and Enactments Chapter) where the firm gets the consent of the Shareholders to issue debt in excess of aggregate of the Paid up Capital and Free Reserves.

II) Delegation of Power

The firm gets the approval for Delegation of Power from the Shareholders (U/s 292 of Companies Act, refer the Acts and Enactments Chapter) to senior officials from Board of Directors for the accomplishment of various formalities required for the Issuance of Bonds. The Chairman and Managing Director and the Director Finance are supposed to accomplish these formalities but due to their time and official constraints their Power has to be delegated to persons who have adequate knowledge to deal with and complete the formalities.

To legally Delegate the Power a Specific Power of Attorney is issued by the Chairman and Managing Director and the Director Finance to a person not below the rank of Additional General Manager. The Specimen Signatures of the Delegated Person is also attested by the Delegating Authority and the Proof of Identity is also certified.

Ex:- For the 39th Issue of Bonds to Army Group Insurance Fund undertaken by NTPC Ltd the Power to accomplish the formalities, enter into agreement with the Investor, Intermediaries, and Stock Exchange and for the Creation of Trust Deed

(Security Creation) Mrs. Renu Narang, AGM (Finance) was authorized by Director Finance.

I) Credit Rating

Credit Rating in itself is a complete process. The firm Issuing Debt of Instruments is mandatorily required to have at least a Credit Rating by one agency which is recognized by the Securities and Exchange Board of India and it must be communicated to; but if the issuer has got rating from more than one Credit Rating Agency then the issuer is compulsorily required to communicate the Ratings by all agencies.

III) Appointment of Intermediaries

The prominent Intermediaries in the Issuance of Bonds are Registrar and Transfer Agent, Trustee, Depository and Banker. The firm appointed as an intermediary has to be authorized by the Securities and Exchange Board of India to be appointed for meeting the requisite role.

IV) Disclosure Document The Preparation of Disclosure Document is mandatory in respect of Issuance of Securities in India. There are set contents that each Disclosure Document must contain in it. The Document acts as a Bio Data of the Firm for the Issuance of the securities by it. The Disclosure Document is prepared in accordance with the Rules and Regulation

lay down by Securities and Exchange Board of India (SEBI). For the Debt Securities the Disclosure Document is prepared under the SEBI: Issue and Listing of Debt Securities Regulations, 2008.

Contents required in Disclosure document for Pvt. Placement

Name of the company o Nature / Type o Address

Disclosure document for private placement of 8.73% secured non cumulative non convertible redeemable taxable bonds series xxxiii in the nature of debenture of Rs. 10 lakh each for cash at par for Rs. 195 crores.

Trustee IDBI Trusteeship Services Ltd Registrar- BEETAL Financial and Computer Services (P) Ltd Banker to the issue- SBI Table of content:o Definitions/ abbreviations o Disclaimer o Nature and Address of registered office of the issuer o Nature and Address of directors of the issue. o Brief summary of Business. o Brief history of issuer since incorporation, details of activities. o Summary term sheet. o Terms of offer

o Credit rating and rationale thereof o Name of debenture trustee. o Details of other borrowings. o Servicing behavior on existing debt securities and other borrowings. o Undertaking regarding common form of transfer. o Material event, development or change at the time of issue. o Permission/ consent from prior creditors. o Material contacts and agreement involving financial obligations of the issuer. o Declaration. o Annexure Credit letter from CRISIL Credit rating letter from ICRA Credit rating letter from CARE Consent letter from Trustee. Consent letter from registrar and T.A. Application form and instructions

Other Servicing activities: Transfer of Bonds. Transmission of Bonds. Redemption of Bonds. Change of status from minor to major.

 Request for change of name/s. Change of Signature. Issuance of duplicate certificate.

V) Issuance

Issuance is the stage wherein the Firm is ready to accept the Funds for purchasing the securities. There are two steps which has to the accomplished before the Issuance takes place, these are:

i) Finalization of coupon rate/ forwarding documents to short listed investors

intimating the pay-in date: The Coupon rates are decided by the methodology which is acceptable to both the Issuer and the Investor. In general there are four factors which affect the coupon rate of the Bond:

a) Economic situation of the country of Issuer. b) Bank Rates c) Published Rates ( AAAINBMK by Reuters) d) Government Securities Rates.

Once the Issuer fulfills both the steps then its ready to accept the payment from the Investors and in return give LOA or actual bonds (depending on choice of registration by the Issuer).

VI) Listing

The Bonds issued can be listed in the stock exchange of the choice of the Issuer, subject to the completion of listing requirements by the issuer. By listing the bonds, the issuer gives the investor and option to trade the security; it acts as an avenue for converting the bonds to cash and vice versa. The bonds can be traded without the help of an exchange also, through Over the Counter Exchange. The Issuer lists the security in order to keep a track on the transfer and exchange of their security.

The Depositories gets notified when a transfer and exchange takes place and the Registrar and Transfer Agent updates its record of the investors from time to time by consulting the depositories (tripartite agreement). Before the interest payments and redemption of the bonds the issuer acquires the latest list of the bond holders by taking a record date from the Registrar and Transfer Agent.

SEBI: ISSUE AND LISTING OF DEBT SECURITIES REGULATIONS, 2008 A) ISSUE OF DEBT SECURITIES 1) General Conditions The company cannot issue if it has been prohibited. Conditions to be satisfied on the date of Filing Of Draft Offer Document and Final Offer Document: a) Application to one or more stock exchange. b) Decide Designated Stock Exchange. c) Appoint one or more Merchant Bankers.

d) Appoint Trustee The issuer shall not issue Debt Securities for providing loan to or for acquisition of shares of any person who is a part of the same group or who is under the same management.

2) Disclosures in the Offer Document Must contain all Material Disclosures Complete Information in Offer Document: a) Specified in Schedule II of Companies Act, 1956 b) Specified in Schedule I

3) Filing Of Draft Offer Document Draft Offer Document must be filed with designated Stock Exchange. Display the Offer Document on the website of the issuer. Lead Manager ensures that the data are correct and are relevant. Filing of Offer Document with Registrar of Companies. Due Diligence Certificate as per Schedule II by Lead Merchant Banker. Due Diligence Certificate by the Debenture Trustees as per Schedule III. 4) Mode of Disclosure of Offer Document In website of Stock Exchange and shall be available in downloadable form. Filing of Offer Document with Stock Exchange.

5) Advertisement for Public Issue Advertisement in National Daily (Disclosure as per Schedule IV).

6) Abridged Prospectus and Application Form

(A) The issuer and lead merchant banker shall ensure that:

(i) Every application form issued by the issuer is accompanied by a copy of the abridged prospectus; (ii) The abridged prospectus shall not contain matters which are extraneous to the contents of the prospectus;

(iii) Adequate space shall be provided in the application form to enable the investors to fill in various details like name, address, etc.

(B) The issuer may provide the facility for subscription of application in electronic mode.

7) Electronic Issuance An issuer proposing to issue debt securities to the public through the on-line system of the designated stock exchange shall comply with the relevant applicable requirements as may be specified by the Board.

8) Price Discovery through Book Building Process (Fixed Price or Book Building) The issuer may determine the price of debt securities in consultation with the lead merchant banker and the issue may be at fixed price or the price may be determined through book building process in accordance with the procedure as may be specified by the Board.

9) Minimum Subscription

The company can fix the Minimum Subscription amount. If the minimum subscription amount is not achieved then the Application Money has to be refunded.

10)Underwriting The issue may or may not be underwritten.

11) Prohibition of Misstatement In Offer Document Shall not omit Disclosures of any fact. No false or misleading statement.

12)Trust Deed

Trust Deed for securing the issue of Debt Securities shall be executed by the issuer in favor of the Debenture Trustee within 3 months of the closure of the issue.

Trust Deed shall contain clauses of Schedule IV of SEBI Regulation, 1993 and Section 117 A of Companies Act, 1956.

13)Debenture Redemption Reserve For the redemption of the Debentures/Bonds, the creation of DRR is a must.

14)Creation of Security The proposal to create charge for securities shall be disclosed in Offer Document. Issuer shall give an undertaking in the offer document that the assets with a Second Charge or Pari Passu charge. 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.

15)Redemption and Rollover Redemption must take place according to the terms of the Offer Document.

Before the Rollover takes place a special resolution (75%) must be passed and 21 days notice must be given. A new rating must be gained for rollover and a new Trust Deed would be formed.

The holders who have not consented for rollover must be redeemed.

B) LISTING OF DEBT SECURITIES Listing Agreement 1) Mandatory Listing Application for listing to one or more recognized Stock Exchanges. Shall comply with conditions of Listing of Debt Securities.

2)

Conditions for Listing of Debt Securities Issued on Private

Placement Privately placed Debt Securities can be listed if:

a) The issued securities are in compliance with Provision of Companies Act, 1956. b) Credit Rating has been obtained. c) Securities are in Demat Form. d) Meet Disclosure Guidelines. The issuer has to comply with the Listing Guidelines.

3)

Disclosure in respect of Private Placement Disclosure as per Schedule I + Annual Report. Disclosure in websites and in downloadable form.

4)

Relaxation of Strict Enforcement (Rule 19)

In exercise of the powers conferred by sub-rule (7) of rule 19 of the Securities Contracts (Regulation) Rules, 1957, the Board hereby relaxes the strict enforcement of: (a) sub-rules (1) and (3) of rule 19 the said rules in relation to listing of debt securities issued by way of a public issue or a private placement; (b) Clause (b) of sub-rule (2) of rule 19 of the said Rules in relation to listing of debt securities, (i) Issued by way of a private placement by any issuer; (ii) Issued to public by an infrastructure company, a Government company, a statutory authority or corporation or any special purpose vehicle set up by any of them, which is engaged in infrastructure sector. OBLIGATIONS OF INTERMEDIARIES AND ISSUERS Obligations of Debenture Trustee (1) The debenture trustee shall be vested with the requisite powers for protecting the interest of holders of debt securities including a right to appoint a nominee director on the Board of the issuer in consultation with institutional holders of such securities. (2) The debenture trustee shall carry out its duties and perform its functions under these regulations, the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, the trust deed and offer document, with due care, diligence and loyalty.

(3) The debenture trustee shall ensure disclosure of all material events on an ongoing basis. (4) The debenture trustees shall supervise the implementation of the conditions regarding creation of security for the debt securities and debenture redemption reserve

Obligations of the Issuer and Lead Merchant Banker:

1) The issuer shall disclose all the material facts in the offer documents issued or distributed to the public and shall ensure that all the disclosures made in the offer document are true, fair and adequate and there is no misleading or untrue statements or misstatement in the offer document.

(2) The Merchant Banker shall verify and confirm that the disclosures made in the offer documents are true, fair and adequate and ensure that the issuer is in compliance with these regulations as well as all transaction specific disclosures required in Schedule I of these regulations and Schedule II of the Companies Act, 1956.

(3) The issuer shall treat the applicants in a public issue of debt securities in a fair and equitable manner as per the procedures as may be specified by the Board.

(4)

The intermediaries shall be responsible for the due diligence in respect of

assignments undertaken by them in respect of issue, offer and distribution of securities to the public. No person shall employ any device, scheme or artifice to defraud in connection with issue or subscription or distribution of debt securities which are listed or proposed to be listed on a recognized stock exchange.

The issuer and the merchant banker shall ensure that the security created to secure the debt securities is adequate to ensure 100% asset cover for the debt securities.

VII)

Security Creation

Security Creation is the process wherein the Bonds issued are backed by the assets of the Issuer. The Issuer usually charges his assets, in other words creates a claim on the assets; if the Issuer is unable to pay back the bond holders then the assets would be liquefies to cash and the bond holders claims would be repaid.

The Security Creation can be of 4 types:

1) Equitable Mortgage: Mortgage by deposit of title deeds is known as Equitable

Mortgage. A mortgage in which the lender is secured by taking possession of all the original title documents of the property that serves as security for the mortgage. In case of Equitable Mortgage, registration is not compulsory.

2) Secured Mortgage: Where the mortgagor binds himself to repay the mortgage

money on a certain date, and transfers the mortgaged property absolutely to the mortgagee (trustee), but subject to a provision that he will re-transfer it to the mortgagor upon payment of the mortgage money as agreed, the transaction is called an English mortgage.

3) Hypothecation: Keeping the Movable assets as collateral for a debt without transferring the possession the asset to the debt provider (trustee) .

4) Pledge

Bond / Debt Servicing

Bond Redemption Reserve

A firm registered under the Companies Act, 1956 has to follow the guidelines for the protection of interests of debenture holders issued by Ministry of Finance, is regarding the servicing of bonds/debentures. According to these Guidelines, a Bond/Debenture Redemption Reserve (RR) shall be created by all the companies raising resources through debt.

Guidelines for Creating Redemption Reserve:

(i) Company should create RR equivalent to 50% (for Public Issue) and 25% (for Private Placement) of the debenture/bond before redemption commences.

(ii) RR may be created either in equal installments for the remaining period or higher amounts if profit permits.

This account will be credited with proceeds from the profits of the company arrived at every year till redemption of the debentures. SEBI regulations provide for creation of security within six months from the date of issue of debentures and if a company fails to create the security within 12 months, it shall be liable to pay 2% penal interest to the

debenture holders. If the security is not created even after 18 months, a meeting of the debenture holders will have to be called to explain the reasons thereof. The issue proceeds will be kept in escrow account until the documents for creation of securities are executed between the Trustees and the company. In case of STRPPs, each STRPP is assessed as a separate Bond issue so for each STRPP different Redemption Reserve is created (but collectively a single Redemption reserve is created), for each STRPP the fund transferred in the reserve would be different depending upon the time after which the STRPP would be redeemed. Interest Treatment

Each Bond carries a Coupon Rate (unless its a Zero Coupon Bond), this coupon rate specifies the Interest charge of the bond. The issuer has the option to pay Interest at monthly, quarterly, half yearly or yearly basis. Depending on the term of Interest payment the yield of the bond would differ. The Issuer is subject to Interest payment to the Bond holders irrespective of whether the firm earns a profit or loss.