In the recent times, corporates in India are tapping one source of funding then anything else (especially, when funding through equity offerings are drying-up) - debt offerings- to general public or through private placements. There is a surge amongst the corporates and banks to issue medium term notes, perpetual bonds or simple bond. Here, I would be dissecting an ‘offering circular’ of a debt offering in two parts-this is the first part.
The soul of a debt offering’s offering circular (OC) is its ‘term-sheet’. I have written about ‘term-sheet’ earlier here. There is no hard and fast rule to draft an OC, however, jurisdictions such as India has provided for basic template under the Securities and Exchange Board of India (Issue and Listing of debt securities) Regulations, 2008. I have taken the OC of Bhira Investments Limited (backed by Tata Power Limited) (Tata Power Backed Deal) as a base model for writing about the OC and its contents in this piece.
In this note, I would be discussing about following aspects of an OC:
• Front Page
• Due-diligence requirements
• Risk Factors
• Terms and Conditions of the Notes
• Global Certificates representing the Notes
• Clearance and Settlement of Notes
• Use of proceeds
• Description of Issuer
• Description of Guarantor
• Enforcement of Guarantee
• Financial Statements
• Other general legal requirements
Front Page
Generally, an OC starts with front page containing:
• Date of offering of debt securities
• Logo of the company offering debt securities and amount involved
• Kind of debt securities offered
• If the offerings are guaranteed
• If the offering is a ‘Regulation S’ offering
• Where will the debt securities be listed
• Denomination of issue of debt securities
• Redemption of the Notes
• Issue opening and closing date
• Logo of investment bankers arranging/ managing the deal
In simple terms, the front page of OC would contain briefs of the ‘terms and conditions’ of the issue of Notes/ debt securities, so that the prospective investors can make out in brief ‘what the offering is about’ and who is the entity behind the offerings and whether a US investor can invest in this offering.
Due-diligence obligations
Well, regarding the due-diligence (DD) for a debt offering – practice varies. Generally, in a private placement there is no requirement for conducting DD. For example in the recent Tata Power Backed Deal, a general disclaimer was draft regarding the DD, which read as:
“Neither the Managers (as described under “Subscription and Sale”, below) nor the Trustee have independently verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Managers or the Trustee as to the accuracy or completeness of the information contained or incorporated in this Offering Circular or any other information provided by the Issuer or the Guarantor in connection with the offering of the Notes. None of the Managers, the Trustee, the Principal Paying Agent, the Transfer Agent or the Registrar accepts any liability in relation to the information contained in this Offering Circular or any other information provided by the Issuer or the Guarantor in connection with the offering of the Notes or their distribution. Advisors named in this Offering Circular have not caused the issue of, and take no responsibility for, this Offering Circular, have acted pursuant to the terms of their respective engagements and do not make, and should not be taken to have verified, any statement or information in this Offering Circular unless expressly stated otherwise.”
Risk Factors
In this section factors which may affect the ability of Issuer or the Guarantor to fulfill their obligations are mentioned. All of these factors are contingencies which may or may not occur and neither the Issuer nor the Guarantor is in a position to express a view on the likelihood of any such contingency occurring. In addition, factors that are material for the purpose of assessing the market risks associated with the Notes are also mentioned in this section.
Term and Conditions (Ts & Cs) of the Notes
The Ts & Cs of the notes issued depends upon cases to case and the terms of the trust deed and the agency agreement signed between the parties (parties are issuer, guarantors and the trustees). In the Tata Power Backed Deal, the Ts & Cs of the notes were categorized as:
• Form, denomination and title of the bond offerings
• Status and Subordination
The section covers the situation- whether the notes constitute direct, unconditional, unsecured and subordinated obligations of the Issuer and whether the notes at all times rank pari passu without any preference among themselves or not.
• Guarantee, if any [which was in the case of Tata Power Backed Deal]
This section covers the aspect of limitation of guarantees, status of guarantees, winding-up of guarantor.
• Interest
This totally depends on the business terms of the issue of notes. Interest payable could be for (a) fixed interest period, (b) floating interest period, (c) optional deferral of interest, (d) increase in rate of interest, (e) capitalization of interest
• Redemption and Purchase
This section covers the aspect of (a) maturity of the notes, (b) early redemption at the option of issuer, (c) early redemption due to various factors, (d) purchase of notes.
• Payments in respect of notes
• Taxation and Gross-ups
Generally, this section is the domain of tax-experts involved in the deal. However, generally in most of the debt offerings, all payments are made to the investors by the issuer without any withholding tax, unless there is contrary law to this effect.
• Prescription
• Further Issue
This section covers the possibility where the issuer intends to issue further notes. The notes may be in parity with the issued notes under the present offering or may be senior/ junior to it.
• Events of default
• Replacements of certificates
• Notices
• Meetings of the note holders, modifications, waiver, authorization and determination
The Trust Deed generally contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the modification or abrogation by Extraordinary Resolution of any of these Conditions or any of the provisions of the Trust Deed.
• Substitution
Generally, in cases, where the dummy companies are incorporated (in jurisdictions such as Mauritius or Cyprus or BVI etc) by the trusted corporate (such as Tata Power), a residual clause is inserted in the OC stating that the issuer may be substituted by another issuer.
• Indemnification and protection of Trustee and its contracting with the Issuer and the Guarantor
The Trust Deed may contain provisions pertaining to indemnification and protection of trustee.
• Governing laws and submission to Jurisdiction
In case of international offerings, generally ‘English law’ is recommended by the law firms as governing law and English courts are given the authority to decide if any dispute arises.
• Rights of Third Parties
The soul of a debt offering’s offering circular (OC) is its ‘term-sheet’. I have written about ‘term-sheet’ earlier here. There is no hard and fast rule to draft an OC, however, jurisdictions such as India has provided for basic template under the Securities and Exchange Board of India (Issue and Listing of debt securities) Regulations, 2008. I have taken the OC of Bhira Investments Limited (backed by Tata Power Limited) (Tata Power Backed Deal) as a base model for writing about the OC and its contents in this piece.
In this note, I would be discussing about following aspects of an OC:
• Front Page
• Due-diligence requirements
• Risk Factors
• Terms and Conditions of the Notes
• Global Certificates representing the Notes
• Clearance and Settlement of Notes
• Use of proceeds
• Description of Issuer
• Description of Guarantor
• Enforcement of Guarantee
• Financial Statements
• Other general legal requirements
Front Page
Generally, an OC starts with front page containing:
• Date of offering of debt securities
• Logo of the company offering debt securities and amount involved
• Kind of debt securities offered
• If the offerings are guaranteed
• If the offering is a ‘Regulation S’ offering
• Where will the debt securities be listed
• Denomination of issue of debt securities
• Redemption of the Notes
• Issue opening and closing date
• Logo of investment bankers arranging/ managing the deal
In simple terms, the front page of OC would contain briefs of the ‘terms and conditions’ of the issue of Notes/ debt securities, so that the prospective investors can make out in brief ‘what the offering is about’ and who is the entity behind the offerings and whether a US investor can invest in this offering.
Due-diligence obligations
Well, regarding the due-diligence (DD) for a debt offering – practice varies. Generally, in a private placement there is no requirement for conducting DD. For example in the recent Tata Power Backed Deal, a general disclaimer was draft regarding the DD, which read as:
“Neither the Managers (as described under “Subscription and Sale”, below) nor the Trustee have independently verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Managers or the Trustee as to the accuracy or completeness of the information contained or incorporated in this Offering Circular or any other information provided by the Issuer or the Guarantor in connection with the offering of the Notes. None of the Managers, the Trustee, the Principal Paying Agent, the Transfer Agent or the Registrar accepts any liability in relation to the information contained in this Offering Circular or any other information provided by the Issuer or the Guarantor in connection with the offering of the Notes or their distribution. Advisors named in this Offering Circular have not caused the issue of, and take no responsibility for, this Offering Circular, have acted pursuant to the terms of their respective engagements and do not make, and should not be taken to have verified, any statement or information in this Offering Circular unless expressly stated otherwise.”
Risk Factors
In this section factors which may affect the ability of Issuer or the Guarantor to fulfill their obligations are mentioned. All of these factors are contingencies which may or may not occur and neither the Issuer nor the Guarantor is in a position to express a view on the likelihood of any such contingency occurring. In addition, factors that are material for the purpose of assessing the market risks associated with the Notes are also mentioned in this section.
Term and Conditions (Ts & Cs) of the Notes
The Ts & Cs of the notes issued depends upon cases to case and the terms of the trust deed and the agency agreement signed between the parties (parties are issuer, guarantors and the trustees). In the Tata Power Backed Deal, the Ts & Cs of the notes were categorized as:
• Form, denomination and title of the bond offerings
• Status and Subordination
The section covers the situation- whether the notes constitute direct, unconditional, unsecured and subordinated obligations of the Issuer and whether the notes at all times rank pari passu without any preference among themselves or not.
• Guarantee, if any [which was in the case of Tata Power Backed Deal]
This section covers the aspect of limitation of guarantees, status of guarantees, winding-up of guarantor.
• Interest
This totally depends on the business terms of the issue of notes. Interest payable could be for (a) fixed interest period, (b) floating interest period, (c) optional deferral of interest, (d) increase in rate of interest, (e) capitalization of interest
• Redemption and Purchase
This section covers the aspect of (a) maturity of the notes, (b) early redemption at the option of issuer, (c) early redemption due to various factors, (d) purchase of notes.
• Payments in respect of notes
• Taxation and Gross-ups
Generally, this section is the domain of tax-experts involved in the deal. However, generally in most of the debt offerings, all payments are made to the investors by the issuer without any withholding tax, unless there is contrary law to this effect.
• Prescription
• Further Issue
This section covers the possibility where the issuer intends to issue further notes. The notes may be in parity with the issued notes under the present offering or may be senior/ junior to it.
• Events of default
• Replacements of certificates
• Notices
• Meetings of the note holders, modifications, waiver, authorization and determination
The Trust Deed generally contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the modification or abrogation by Extraordinary Resolution of any of these Conditions or any of the provisions of the Trust Deed.
• Substitution
Generally, in cases, where the dummy companies are incorporated (in jurisdictions such as Mauritius or Cyprus or BVI etc) by the trusted corporate (such as Tata Power), a residual clause is inserted in the OC stating that the issuer may be substituted by another issuer.
• Indemnification and protection of Trustee and its contracting with the Issuer and the Guarantor
The Trust Deed may contain provisions pertaining to indemnification and protection of trustee.
• Governing laws and submission to Jurisdiction
In case of international offerings, generally ‘English law’ is recommended by the law firms as governing law and English courts are given the authority to decide if any dispute arises.
• Rights of Third Parties
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