Firms issuing offshore bonds hit a company law hurdle

Indian companies looking to raise money abroad through offshore bond issuances to overseas investors are in a bind, thanks to the new company law requirement around private placement of securities.

They are now looking up to the Corporate Affairs Ministry (MCA) to provide clarity on whether issuances of foreign currency denominated securities like foreign currency convertible bonds (FCCBs) would get covered under the private placement norms.

If private placement norms are applicable to FCCBs, then the domestic companies would have to endure certain compliance burden, raising the cost of funds in such overseas bond sales. The question confounding Indian companies like NTPC – which is looking to issue offshore bonds – is that whether FCCBs and other foreign currency denominated bonds get covered within the meaning of “securities” under Section 42 of the new company law. There is no clarity on this front although bonds come within the definition of securities under the Securities Contracts (Regulation) Act 1956 (SCRR).

NTPC has written to the MCA seeking clarity on this matter, sources said.

Company law professionals including lawyers have knocked the Ministry’s doors. The new company law defines ‘securities’ to have the same meaning as is provided to this term in SCRR. SCRR defines securities to include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.

“A foreign bond issuance should not be covered under Section 42 (private placement of securities) as it is not an issuance to Indian investors, but it is an overseas issuance by an Indian company to non-Indian investors coupled with a listing of the debt securities on an overseas exchange,” Lalit Kumar, Partner, J Sagar Associates, a law firm told BusinessLine .

Therefore, it is important that the position regarding this is clarified by MCA as soon as possible, he added.

An offshore bond as commonly referred to, is a foreign currency-denominated instrument which can be subscribed by overseas investors and is issued in a foreign jurisdiction by an Indian issuer, and is listed on an overseas exchange.

In other words, it is a debt security marketed in the international capital markets to investors in countries outside the issuer’s domestic market and/or denominated in a foreign currency.

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