Global Certificates representing the Notes
As a market practice, in international offerings such as Tata Power Backed Deal, the Global Certificates (GC) are issued to the investors, which more or less have the same Ts & Cs of the Notes. Notes in registered form will be represented by a registered GC. One GC is issued in respect of each Noteholder’s entire holdings of registered Notes. The GC contain information about the accountholders. Cancellation, payments, notices, registration of title, transfers, record date etc. Additionally, for as long as bonds/notes are represented by the GC, payments of principal and interest in respect of the bonds/notes will be made without presentation or if no further payment falls to be made in respect of the bonds/notes against presentation and surrender of the GC to or to the other principal agents for such purpose.
Clearance and Settlement of Notes
To issue and transfer of bonds/ notes, the issuer generally enters into an agreement with the clearing and settling agency. In the Tata Power Backed Deal, custodial and depositary links were established with Euroclear and Clearstream, Luxembourg to facilitate the initial issue of the Notes and transfers of the Notes associated with secondary market trading. In international debt offerings, Euroclear and Clearstream are preferred because they provide services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing.
Global clearance and settlement procedures
Initial settlement
Interests in the Notes will be in uncertificated book-entry form. Purchasers electing to hold book-entry interests in the Notes through Euroclear and Clearstream, Luxembourg accounts will follow the settlement procedures applicable to conventional eurobonds. Book-entry interests in the Notes will be credited to Euroclear and Clearstream, Luxembourg participants’ securities clearance accounts on the business day following the Issue Date against payment (for value on the Issue Date).
Secondary market trading
Secondary market sales of book-entry interests in the Notes held through Euroclear or Clearstream, Luxembourg to purchasers of book-entry interests in the Notes through Euroclear or Clearstream, Luxembourg will be conducted in accordance with the normal rules and operating procedures of Euroclear and Clearstream, Luxembourg and will be settled using the procedures applicable to conventional participants.
Use of proceeds
It depends and the practice varies. In Tata Power Backed Deal the use of proceeds was:
“The proceeds of the issue of the Notes will be applied by Issuer to fund its corporate and acquisitive activities and to repay the outstanding amount of U.S.$247 million owed by Bhivpuri Investments Limited under a U.S.$590 million non-recourse facility. No amount of the use of proceeds will be used in India by the Guarantor.”
Description of Issuer
Generally in global offerings which are backed by big corporate, there is very less to mention under this heading, as most of the issuers are paper companies incorporated under Mauritius, BVI, Cyprus laws. It covers the information about the business, board of directors and general information about the issuer company.
Description of Guarantor
Where the debt offering is backed by the guarantor, this section is of major importance. This section covers detailed information about the guarantor-the information may range from incorporation to board of directors to shareholding pattern to financial statements to business segment to industry overview etc. (it’s more or less like information provided under the prospectus for the equity offerings, about the issuer).
Enforcement of Guarantee
This section was drafted in the Tata Power Backed Deal, where, Tata Power guaranteed the return on investments to the investors. Tata Power, an Indian listed company can do so only because of certain enabling provisions under the India laws.
A guarantee issued by an Indian company on behalf of its non-Indian direct or indirect wholly owned subsidiaries or joint ventures is subject to certain regulations under Foreign Exchange Management Act, 1999 (FEMA), such as the Foreign Exchange Management (Guarantees) Regulations, 2000 (the FEMA Guarantees Regulations) and the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, 2004 (as amended, the FEMA ODI Regulations) as well as the provisions of the RBI’s Master Circulars on Direct Investment by Residents in Joint Venture / Wholly Owned Subsidiary Abroad that are periodically updated by the RBI, with the latest master circular dated 1 July 2010 (Master Circular).
Under the FEMA Guarantees Regulations, an Indian company can provide a guarantee on behalf of its non-Indian wholly owned subsidiaries or joint ventures if it is in connection with its business and provided that it is in compliance with the FEMA ODI Regulations. Pursuant to the FEMA ODI Regulations and the Master Circular, an Indian company is permitted to provide a guarantee on behalf of its non-Indian wholly owned subsidiaries or joint ventures without the prior approval of the RBI, subject to certain conditions including, without limitation:
(i) such Indian company’s total financial commitment does not exceed 400 per cent of its net worth set forth in its last audited balance sheet at the time of issuance of any such guarantee. For purposes of the FEMA ODI Regulations, “total financial commitment” includes the aggregate direct equity contributions, loans provided and amount of guarantees given by the Indian company on behalf of all non-Indian wholly owned subsidiaries and joint ventures;
(ii) the Indian company (which is providing the guarantee outside India) is not on the RBI’s exporters’ caution list or list of defaulters to the system circulated by specified entities or is under investigation by any investigation or enforcement agency or regulatory body; and
(iii) the guarantees must specify a maximum amount and duration of the guarantee upfront i.e. no guarantee can be open-ended or unlimited.
The Indian company is required to disclose certain terms of the guarantee to the RBI, in Form ODI, through an authorised dealer (bank) in India. The non-Indian wholly owned subsidiaries or joint ventures must be engaged in bona fide business activities.
Generally, following language is used in the OC, if the above mentioned legal requirements are met:
“The Company has complied with all such requirements as prescribed under the FEMA ODI Regulations and the Master Circular with respect to the issuance of the Guarantee and therefore, no RBI approval is required for the granting of the Guarantee as set out in the Trust Deed.”
Generally, under Section 372A of the Companies Act, 1956 (the Companies Act), an Indian company is required to obtain by special resolution the approval of 75 per cent of its shareholders entitled and voting on the matter prior to issuing a guarantee which, together with existing loans, investments and guarantees, exceeds the greater of (i) 60 per cent of the aggregate paid up share capital and free reserves; or (ii) all of its free reserves. Section 372A does not apply, namely, to any guarantee given by a “holding company” (as defined in the Companies Act) in respect of a loan made to its wholly owned subsidiary.
Financial Statements
This section is one of the most important section of an OC. Generally, this portion is drafted by the auditors and after several rounds of ‘circle-ups’ and review by lawyers finally inserted in an OC. Financial statements covers (a) auditors report, (b) consolidated balance sheet, (c) consolidated profit-loss account and (d) consolidated cash flow statement.
Other general legal requirements
Before floating a debt offering, certain background work needs to be done by the issuer, which includes:
• The constitutional documents (Memorandum and Articles) of the issuer provides for issue of debt securities/Notes.
• The issue of notes was duly authorized by a resolution of board of director of issuer
• Application has been made and approval-in-principle has been received for the listing of the Notes on the Stock Exchange(s).
• Depending on where the Notes are listed, the Issuer and the shall appoint and maintain a paying agent, where the Notes may be presented or surrendered for payment or redemption, in the event that the Global Certificate is exchanged for definitive Registered Notes.
• The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg (this is not a universal requirement).
• Subscription Agreement is signed with the managers to the offer.
• Trust deed is executed between the issuer and the trustees and other relevant party(ies).
• Agency Agreement is executed between the issuer and the trustees and other relevant party(ies).
As a market practice, in international offerings such as Tata Power Backed Deal, the Global Certificates (GC) are issued to the investors, which more or less have the same Ts & Cs of the Notes. Notes in registered form will be represented by a registered GC. One GC is issued in respect of each Noteholder’s entire holdings of registered Notes. The GC contain information about the accountholders. Cancellation, payments, notices, registration of title, transfers, record date etc. Additionally, for as long as bonds/notes are represented by the GC, payments of principal and interest in respect of the bonds/notes will be made without presentation or if no further payment falls to be made in respect of the bonds/notes against presentation and surrender of the GC to or to the other principal agents for such purpose.
Clearance and Settlement of Notes
To issue and transfer of bonds/ notes, the issuer generally enters into an agreement with the clearing and settling agency. In the Tata Power Backed Deal, custodial and depositary links were established with Euroclear and Clearstream, Luxembourg to facilitate the initial issue of the Notes and transfers of the Notes associated with secondary market trading. In international debt offerings, Euroclear and Clearstream are preferred because they provide services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing.
Global clearance and settlement procedures
Initial settlement
Interests in the Notes will be in uncertificated book-entry form. Purchasers electing to hold book-entry interests in the Notes through Euroclear and Clearstream, Luxembourg accounts will follow the settlement procedures applicable to conventional eurobonds. Book-entry interests in the Notes will be credited to Euroclear and Clearstream, Luxembourg participants’ securities clearance accounts on the business day following the Issue Date against payment (for value on the Issue Date).
Secondary market trading
Secondary market sales of book-entry interests in the Notes held through Euroclear or Clearstream, Luxembourg to purchasers of book-entry interests in the Notes through Euroclear or Clearstream, Luxembourg will be conducted in accordance with the normal rules and operating procedures of Euroclear and Clearstream, Luxembourg and will be settled using the procedures applicable to conventional participants.
Use of proceeds
It depends and the practice varies. In Tata Power Backed Deal the use of proceeds was:
“The proceeds of the issue of the Notes will be applied by Issuer to fund its corporate and acquisitive activities and to repay the outstanding amount of U.S.$247 million owed by Bhivpuri Investments Limited under a U.S.$590 million non-recourse facility. No amount of the use of proceeds will be used in India by the Guarantor.”
Description of Issuer
Generally in global offerings which are backed by big corporate, there is very less to mention under this heading, as most of the issuers are paper companies incorporated under Mauritius, BVI, Cyprus laws. It covers the information about the business, board of directors and general information about the issuer company.
Description of Guarantor
Where the debt offering is backed by the guarantor, this section is of major importance. This section covers detailed information about the guarantor-the information may range from incorporation to board of directors to shareholding pattern to financial statements to business segment to industry overview etc. (it’s more or less like information provided under the prospectus for the equity offerings, about the issuer).
Enforcement of Guarantee
This section was drafted in the Tata Power Backed Deal, where, Tata Power guaranteed the return on investments to the investors. Tata Power, an Indian listed company can do so only because of certain enabling provisions under the India laws.
A guarantee issued by an Indian company on behalf of its non-Indian direct or indirect wholly owned subsidiaries or joint ventures is subject to certain regulations under Foreign Exchange Management Act, 1999 (FEMA), such as the Foreign Exchange Management (Guarantees) Regulations, 2000 (the FEMA Guarantees Regulations) and the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, 2004 (as amended, the FEMA ODI Regulations) as well as the provisions of the RBI’s Master Circulars on Direct Investment by Residents in Joint Venture / Wholly Owned Subsidiary Abroad that are periodically updated by the RBI, with the latest master circular dated 1 July 2010 (Master Circular).
Under the FEMA Guarantees Regulations, an Indian company can provide a guarantee on behalf of its non-Indian wholly owned subsidiaries or joint ventures if it is in connection with its business and provided that it is in compliance with the FEMA ODI Regulations. Pursuant to the FEMA ODI Regulations and the Master Circular, an Indian company is permitted to provide a guarantee on behalf of its non-Indian wholly owned subsidiaries or joint ventures without the prior approval of the RBI, subject to certain conditions including, without limitation:
(i) such Indian company’s total financial commitment does not exceed 400 per cent of its net worth set forth in its last audited balance sheet at the time of issuance of any such guarantee. For purposes of the FEMA ODI Regulations, “total financial commitment” includes the aggregate direct equity contributions, loans provided and amount of guarantees given by the Indian company on behalf of all non-Indian wholly owned subsidiaries and joint ventures;
(ii) the Indian company (which is providing the guarantee outside India) is not on the RBI’s exporters’ caution list or list of defaulters to the system circulated by specified entities or is under investigation by any investigation or enforcement agency or regulatory body; and
(iii) the guarantees must specify a maximum amount and duration of the guarantee upfront i.e. no guarantee can be open-ended or unlimited.
The Indian company is required to disclose certain terms of the guarantee to the RBI, in Form ODI, through an authorised dealer (bank) in India. The non-Indian wholly owned subsidiaries or joint ventures must be engaged in bona fide business activities.
Generally, following language is used in the OC, if the above mentioned legal requirements are met:
“The Company has complied with all such requirements as prescribed under the FEMA ODI Regulations and the Master Circular with respect to the issuance of the Guarantee and therefore, no RBI approval is required for the granting of the Guarantee as set out in the Trust Deed.”
Generally, under Section 372A of the Companies Act, 1956 (the Companies Act), an Indian company is required to obtain by special resolution the approval of 75 per cent of its shareholders entitled and voting on the matter prior to issuing a guarantee which, together with existing loans, investments and guarantees, exceeds the greater of (i) 60 per cent of the aggregate paid up share capital and free reserves; or (ii) all of its free reserves. Section 372A does not apply, namely, to any guarantee given by a “holding company” (as defined in the Companies Act) in respect of a loan made to its wholly owned subsidiary.
Financial Statements
This section is one of the most important section of an OC. Generally, this portion is drafted by the auditors and after several rounds of ‘circle-ups’ and review by lawyers finally inserted in an OC. Financial statements covers (a) auditors report, (b) consolidated balance sheet, (c) consolidated profit-loss account and (d) consolidated cash flow statement.
Other general legal requirements
Before floating a debt offering, certain background work needs to be done by the issuer, which includes:
• The constitutional documents (Memorandum and Articles) of the issuer provides for issue of debt securities/Notes.
• The issue of notes was duly authorized by a resolution of board of director of issuer
• Application has been made and approval-in-principle has been received for the listing of the Notes on the Stock Exchange(s).
• Depending on where the Notes are listed, the Issuer and the shall appoint and maintain a paying agent, where the Notes may be presented or surrendered for payment or redemption, in the event that the Global Certificate is exchanged for definitive Registered Notes.
• The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg (this is not a universal requirement).
• Subscription Agreement is signed with the managers to the offer.
• Trust deed is executed between the issuer and the trustees and other relevant party(ies).
• Agency Agreement is executed between the issuer and the trustees and other relevant party(ies).
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