This write-up is on issuance of bonds under the Indian laws. By way of example I have considered the issue of perpetual bonds. The unique features of the perpetual bond securities (“Perpetual Bonds”) are that (i) they are perpetual in nature with no maturity or redemption and (ii) can be are called only at the option of the company issuing the bonds.
Condition Precedents for issue of bonds in India
1. Certified copy of the Memorandum & Articles of Association of the Company should contain the clause of the ‘bond issuance’.
2. Certified true copy of the resolution passed by the Board of Directors at the meeting approving the issue of Perpetual Bonds.
3. Certified true copy of the resolution passed by the Members of the Company at the Annual General Meeting under section 293(1)(d) of the Companies Act, 1956.
4. Credit rating letter from rating agency.
5. Letter from debenture trustees giving its consent to act as debenture trustees.
6. In-principle approval from the recognized stock exchanges.
Market precedents for Perpetual Bonds issuance
1. In India recently, Tata Steel came up with the issue of Perpetual Bonds (17 March, 2011). As per the term-sheet and the information memorandum available at the NSE website, Tata Steel came out with an issue of:
“UNSECURED, SUBORDINATED PERPETUAL, LISTED, RATED HYBRID SECURITIES IN THE FORM OF NON CONVERTIBLE DEBENTURES ON A PRIVATE PLACEMENT BASIS”
2. All the above-mentioned adjectives are the characteristics of the Perpetual Bonds issued by Tata Steel. It is a new type of instrument issued for the first time in India, at least as per the reports in the media. The meaning of the hybrid instrument is described below:
a. Unsecured: this means the Perpetual Bonds issued by Tata Steel to the investors or the debt holders is not backed by any security. Generally, the debt issuances in India are secured by portion of land (e.g. mortgage of immovable property) or some movable properties as security (e.g. hypothecation of stocks, shares etc) . However, in the present case there is no security available to the investors.
b. Subordinate perpetual: Perpetual Bonds are subordinated to the claims of all other senior or secured creditors. The Securities are senior only to share capital and any other securities at par with share capital of the Issuer.
Bonds issued are perpetual in nature unless the Tata Steel or Issuer elects to redeem the securities as permitted under the brief terms and conditions of the issue. Accordingly, the Perpetual Bonds have no fixed final redemption date. In addition, holders of the Perpetual Bonds have no right to call for the redemption of the bonds, although they may launch proceedings against the Issuer in the event of non-payment other than as validly deferred and insolvency of the Issuer or winding-up.
c. Rated Hybrid securities: Perpetual Bonds would be rated by a credit rating agency.
d. Listed: Listed on the recognized stock exchange.
If anybody knows
How are these Perpetual Bonds hybrid? I am not able to make out; to me it appears to be a simple NCD with no traces of equity involved.
A decent write-up on the Tata Steel’s Perpetual Bonds offering can be viewed at the web link: http://www.livemint.com/2011/03/22223432/Biggest-debtor-Tata-Steel-turn.html
In my view, typically such type of issues are subscribed by the group companies of the issuer, as no investor would like to have a ‘call option’ and “no” ‘put option’ especially when the investor is giving money as a debt and that too unsecured.
Role of Transactional Lawyer
In my experience, a lawyer is generally asked to draft (i) the information memorandum, (ii) debenture trust deed, (iii) share pledge agreement, (iv) Hypothecation and Mortgage agreement, (v) Put option agreement etc.
Recently there has been a trend of company secretary or compliance officers or legal counsel of the issuer company drafting the above-mentioned transaction documents-which are fairly standard in nature. If there is some complexity law firms are hired.
In my view the most important document is the term-sheet, which essentially covers the terms of the debt issuance. Typically, a term-sheet consists of information on issuer, arranger, commitment provider, type of instrument issued, status of securities, tenure, put/call option, record date, use of proceeds, distribution/rate, pay-in date, mode of placement, CPs to the issue, taxes and governing laws. A transactional lawyer must carefully read and understand the term sheet, if necessary clarify the terms from the bankers and/ or issuer company concerned.
I would like to discuss the above-mentioned agreements in greater details in some other posts.
1 comment:
Companies sometimes issue bonds that they call perpetuities, but in actual practice they are not so. For example in 2004 Korea First Bank sold $300 million of debt in the form of perpetual bonds that has no fixed maturity date. Although the bond had no fixed maturity date the Korea First Bank had the right to pay the debt back in 10 years and 40 years . Thus although the bonds had no maturity date but they would eventually be matured/ paid off in 10 years or 40 years. They will not pay interests forever.
Post a Comment