NCD & Debenture Issuance Advisory

A private limited company cannot issue non-convertible debentures (NCDs) to the public — public issues of debt securities are restricted to public companies under Section 2(71) of the Companies Act 2013. A private limited company may issue NCDs on a private placement basis to a maximum of 200 persons in a financial year per Section 42 of the Companies Act 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules 2014. For a public company issuing listed NCDs to the public, SEBI (Issue and Listing of Non-Convertible Securities) Regulations 2021 apply, requiring a SEBI-registered debenture trustee, credit rating from at least one SEBI-registered CRA, and listing on a recognised stock exchange (BSE or NSE) within six working days of allotment. The offer document must comply with SEBI ICDR Regulations 2018 if accompanied by an equity component, or the NCS Regulations 2021 for pure debt.

Under Section 71(5) of the Companies Act 2013, a debenture trustee must be appointed before issuing a prospectus or letter of offer for secured or listed debentures. SEBI (Debenture Trustees) Regulations 1993 specify that only entities registered with SEBI as debenture trustees may be appointed; currently active registered trustees include IDBI Trusteeship, Catalyst Trusteeship, and Beacon Trusteeship, among others. For private placement NCDs not listed on any exchange, the Companies Act 2013 does not mandate a debenture trustee unless the debentures are secured — if secured, a trust deed must be executed within 60 days of allotment under Section 71(10). The debenture trustee must verify the creation of security, conduct half-yearly inspections of the company's accounts, and convene debenture holders' meetings if the company defaults — all of which are obligations under the SEBI (Debenture Trustees) Regulations 1993 as amended in 2020.

Interest paid on listed NCDs held in dematerialised form is exempt from TDS under Section 193 of the Income Tax Act 1961, specifically under the proviso to Section 193 which excludes interest on listed securities held in dematerialised form. However, if the NCDs are not listed or are held in physical form, TDS at 10% is deductible under Section 193 if the interest payable in a financial year exceeds ₹5,000 per holder. For non-resident holders, TDS is governed by Section 195 of the Income Tax Act 1961 at rates specified under the relevant DTAA or the domestic rate of 20% plus surcharge and cess (whichever is lower under Section 90). Issuers must file TDS returns in Form 26Q (for residents) or Form 27Q (for non-residents) quarterly and issue Form 16A / Form 27A within 15 days of the due date for filing the quarterly return.

Under Section 71(3) of the Companies Act 2013, where NCDs are issued as secured, the security must be created within 30 days of allotment, and a trust deed executed within 60 days. If the security is not created within the 60-day window, the company is in default and every officer in default is liable to a penalty under Section 71(11) read with Section 450 of the Companies Act 2013. Additionally, Rule 18 of the Companies (Share Capital and Debentures) Rules 2014 specifies the assets that may be charged, the process for registration of the charge under Section 77 of the Companies Act 2013 (within 30 days of creation), and the requirement to maintain a Debenture Redemption Reserve (DRR) equal to 25% of the value of outstanding debentures before redemption begins — though the DRR requirement was eliminated for listed companies and certain NBFCs by the Companies (Share Capital and Debentures) Amendment Rules 2019. An unregistered charge is void against a liquidator and creditors under Section 77(3).

The issuance and redemption of NCDs are not subject to GST because they constitute a transaction in 'securities', which are excluded from the definition of 'goods' under Section 2(52) of the CGST Act 2017 and excluded from 'services' under Schedule III, Entry 6, which exempts actionable claims other than betting/gambling/lottery. Interest paid on NCDs is also not subject to GST — interest earned on loans or advances (including debt securities) is exempt under Notification No. 12/2017 – Central Tax (Rate) dated June 28, 2017, Entry 27, which exempts services by way of extending deposits or loans where the consideration is represented by interest. However, if your company pays processing fees, debenture trustee fees, or NCD management fees to service providers, those fees are subject to GST at 18% under the forward charge mechanism and eligible as input tax credit under Section 16 of the CGST Act 2017 to the extent they relate to taxable outputs.