Raising of Funds from Debt and Procedural Aspects: formula sheet

Key formulas

Debt vs equity test

Debt = fixed return + repayment + no ownership; Equity = residual return + no repayment + ownership

Use this as the base of every comparison answer.

Effective cost of debt after tax

Kd (after tax) = Interest rate × (1 − tax rate)

Applies because interest is deductible. Use the correct tax rate given in the question.

Commercial paper discount yield

Effective return = (Face value − Issue price) ÷ Issue price × (365 ÷ days to maturity)

Simple annualised approach. Use the day count given in the question.

Audit Committee role in loans and investments

Section 177(4)(v): scrutiny of inter-corporate loans and investments

The Audit Committee of a listed public company and prescribed companies has this term of reference. It must have at least three directors with independent directors in the majority (section 177(2)).

Board's power to borrow

Borrowing = Board resolution at a meeting (s.179(3)(d))

Delegable to a committee, MD, manager or principal officer by a resolution passed at a meeting.

Section 180(1)(c) ceiling

Paid-up share capital + free reserves + securities premium

If existing borrowings plus new borrowing exceed this aggregate, a special resolution is needed.

Excluded from the ceiling

Temporary loans from company's bankers in the ordinary course of business

Repayable on demand or within six months; capital expenditure loans are not temporary loans.

Content of the resolution

Special resolution must specify the total amount up to which money may be borrowed (s.180(2))

A resolution without a stated limit is defective.

Effect of excess debt

Debt above the limit is invalid unless the lender proves good faith and no knowledge of the breach (s.180(5))

Protects the lender only if it acted in good faith.

Producer company articles

Mutual assistance principles s.378G(2) + specific provisions s.378G(3)

Includes the amount of reserves, sources of funds, limits on raising funds and extent of debt.

Convertible debentures

Option to convert wholly or partly into shares at redemption → special resolution at a general meeting (s. 71(1) proviso)

Applies to the issue of debentures with a conversion option.

No voting rights

No company shall issue debentures carrying voting rights (s. 71(2))

Debenture-holders are creditors, not members.

Debenture trustee threshold

Offer to public, or to members exceeding 500 → appoint trustee before the offer (s. 71(5))

Appointment must come before the issue or offer, not after.

Trustee liability

Clause exempting trustee from breach-of-trust liability is void if he fails to show due care (s. 71(7)); exemption allowed if agreed by holders of ≥ 3/4 in value at a meeting

Remember the three-fourths in value condition.

DRR

Create DRR out of profits available for dividend; use only for redemption (s. 71(4)); quantum per Rules (s. 71(13))

State the principle from the Act and the percentage from the Rules.

Private placement limits

Identified persons ≤ 50 (or higher prescribed number), excluding QIBs and ESOP employees, in a financial year (s. 42(2))

Non-compliance with s. 42(2) makes the issue a public offer (s. 42(11)).

Allotment and refund

Allot within 60 days of receiving application money; else refund within 15 days after the 60 days; later delay attracts 12% p.a. interest from the 60th day (s. 42(6))

Money is kept in a separate bank account in a scheduled bank.

Return of allotment

File return of allotment with Registrar within 15 days of allotment (s. 42(8))

Penalty: ₹1,000 per day of default, up to ₹25 lakh (s. 42(9)).

Remedies

Default in redemption or interest → Tribunal may direct redemption on application of holders or trustee (s. 71(10)); trustee may petition if assets are insufficient (s. 71(9))

Know who can approach the Tribunal and why.

Public offer vs private placement test

Offer to identified persons ≤ 50 (or higher prescribed number) in a financial year, excluding QIBs and ESOP employees = private placement; beyond this = deemed public offer

Section 42(2) and Explanation III. A private placement not complying with sub-section (2) is deemed a public offer under section 42(11).

Allotment timeline in private placement

Allot within 60 days of receipt of application money; refund within 15 days after those 60 days; else interest at 12% p.a. from the 60th day

Section 42(6). Money is kept in a separate bank account in a scheduled bank.

Return of allotment

File return of allotment with Registrar within 15 days of allotment

Section 42(8). Penalty is ₹1,000 per day of default, capped at ₹25 lakh (section 42(9)).

Penalty for contravention of section 42

Penalty up to the amount raised or ₹2 crore, whichever is lower

Section 42(10). Company must also refund with interest within 30 days of the penalty order. Sub-section (11) overrides (9) and (10) where the sub-section (2) cap is breached: that issue is a deemed public offer.

Who may issue to the public

Public company: public offer, private placement, rights or bonus. Private company: rights, bonus or private placement only

Section 23(1) and (2). A private company cannot make a public offer.

Eligibility and offer document for a public issue of NCS

Issuer, promoters and directors not barred by SEBI + other eligibility conditions → draft offer document to exchange for public comments → final prospectus / shelf prospectus with tranche prospectus

NCS Regulations, 2021 with the Companies Act prospectus provisions. The offer document discloses business, financials, risk factors, objects, security and terms of the NCS.

Rating, trustee and listing in a public issue of NCS

Rating from a SEBI-registered CRA + SEBI-registered debenture trustee and trust deed → listing on a recognised stock exchange

Rating informs investors of credit risk. The trustee protects holders. Listing gives liquidity. Check the current regulations for exact time limits before quoting any.

Chain of public issue of NCS

Eligibility → offer document with disclosures → credit rating → debenture trustee → listing → continuing obligations

Framework under the SEBI NCS Regulations, 2021. Check the exact thresholds and time limits in the current regulations before quoting them.

Time limit for registration (s. 77(1))

Creation of charge + 30 days

Particulars signed by the company and the charge-holder, with the instrument, filed with the Registrar in the prescribed form and fee.

Condonation for charges created on or after the 2019 Amendment (s. 77, first proviso (b))

Day 31 to day 60, on application and additional fees

The Registrar may allow registration within 60 days of creation.

Further extension (s. 77, second proviso (b))

Further 60 days, on application and ad valorem fees

If the 60 days are missed, the Registrar may allow registration within a further period of 60 days after payment of the prescribed ad valorem fees.

Effect of non-registration (s. 77(3), (4))

Unregistered charge is not taken into account by a liquidator or other creditor; the repayment obligation is not prejudiced

Applies to a liquidator appointed under the Act or under the IBC. The charge is not taken into account by the liquidator or other creditor unless it is registered and the Registrar has issued a certificate of registration.

Registration by charge-holder (s. 78)

Charge-holder applies; Registrar decides within 14 days after notice to the company

The charge-holder can recover the fees it paid from the company.

Acquisition of property subject to a charge and modification (s. 79)

Section 77 applies, so far as may be

Covers a company acquiring property subject to a charge, and any change in the terms, conditions, extent or operation of a registered charge.

Satisfaction of charge (s. 82(1))

Payment or satisfaction in full + 30 days

Registrar may allow intimation within 300 days on application and additional fees. Application may be made by the company or the charge-holder.

Show-cause notice before memorandum of satisfaction (s. 82(2))

Notice to charge-holder, time not exceeding 14 days

Notice is not needed if the intimation is in the specified form and signed by the charge-holder.

Floating charge before winding up (s. 332)

Created within 12 months before winding up commences: invalid unless company was solvent immediately after creation

If solvency is not proved, the charge is invalid except for the cash paid to the company at or after creation, in consideration for the charge, plus interest at 5% per annum or the notified rate.

Ban on public deposits

Section 73(1): no invite, accept or renew deposits from the public except under the Chapter

Exempt: a banking company and an NBFC as defined in the RBI Act, 1934, and other companies specified by the Central Government after consultation with the RBI.

Deposits from members

Section 73(2): general meeting resolution + circular to members (financial position, credit rating, total number of depositors, amount due on earlier deposits) + copy of circular filed with Registrar within thirty days before the date of issue + DRA by 30 April + no default + security (if any)

Unsecured deposits must be described as 'unsecured deposits' in every circular, form and advertisement.

Deposit repayment reserve

DRA ≥ 20% of deposits maturing in the next financial year, deposited on or before 30 April each year, in a separate account in a scheduled bank

Section 73(2)(c). Under section 73(5) it can be used only to repay deposits.

Default bar on deposits

No default in repaying deposits or interest; if a default occurred, it was made good and five years have passed

Section 73(2)(e), as substituted in 2018.

Depositor's remedy

Failure to repay: depositor applies to the Tribunal

Section 73(4). The Tribunal can order payment and compensation for loss.

Section 186(2) ceiling

Limit = higher of (60% × (paid-up share capital + free reserves + securities premium)) and (100% × (free reserves + securities premium))

Covers loans, guarantees, security and acquisition of securities taken together.

Approval above the ceiling

Section 186(3): prior special resolution in general meeting if aggregate (existing + proposed) exceeds the limit

No special resolution is needed for loans, guarantees, security to a wholly owned subsidiary or joint venture company, or for a holding company's acquisition of securities of its wholly owned subsidiary. Details must still be disclosed.

Board and lender approval

Section 186(5): Board resolution passed at a meeting with the consent of all directors present, in every case + prior approval of the public financial institution where a term loan subsists

The proviso removes the need for PFI approval only where the aggregate, including the proposed amount, is within the section 186(2) limit and there is no default in repaying that loan or its interest.

Interest rate floor

Loan rate ≥ prevailing yield of 1, 3, 5 or 10 year G-Sec closest to the tenor

Section 186(7).

Default bar on lending

A company in default on deposits or interest cannot give loans, guarantees, security or make acquisitions while default subsists

Section 186(8).

Penalty under section 186

Company: ₹25,000 to ₹5,00,000. Officer in default: up to 2 years' imprisonment and fine of ₹25,000 to ₹1,00,000

Section 186(13).

Creditors' approval for a scheme (section 230(6))

Majority of persons representing three-fourths in value of the creditors or class voting in person, by proxy or by postal ballot

Both limbs apply: a majority of persons and three-fourths in value of those voting. The Tribunal must then sanction the scheme for it to bind.

Corporate debt restructuring disclosure (section 230(2)(c))

Consent of not less than 75% of secured creditors in value

Needs a creditors' responsibility statement, auditor's liquidity-test report and registered valuer's report.

Dispensing with a creditors' meeting (section 230(9))

Creditors or class holding at least 90% in value confirm by affidavit

The Tribunal may then dispense with the meeting. It is a power, not an automatic right.

Objection to a scheme (section 230(4) proviso)

Holders of ≥ 10% shareholding or debt ≥ 5% of total outstanding debt (latest audited statements)

Only such persons may object to the compromise or arrangement.

Filing of Tribunal order (section 230(8))

Within 30 days of receipt of the order, with the Registrar

The company files it.

Notice to regulators (section 230(5))

Representations within 30 days of receipt of notice

If none, it is presumed they have none to make.

Quick revision

• Board powers under section 179 are subject to the Act, the memorandum, the articles and the company's general meeting regulations.
• The Board cannot do what the Act or articles require the company in general meeting to do.
• Under section 179(3), borrowing, investing and giving loans, guarantees or security need Board resolutions passed at meetings.
• The Board may delegate the powers in clauses (d) to (f) of section 179(3) by a resolution passed at a meeting.
• The general meeting can impose restrictions and conditions on the Board's powers (section 179(4)).
• A regulation made in general meeting does not invalidate a prior valid Board act.
• Section 73 bars inviting, accepting or renewing deposits from the public except as the Chapter provides; banks and NBFCs are excluded.
• Under section 73(2), deposits from members need a general meeting resolution and a circular filed with the Registrar.
• The deposit repayment reserve account must hold at least 20% of deposits maturing in the next financial year, deposited by 30 April.
• The deposit repayment reserve account can be used only to repay deposits.
• A depositor can apply to the Tribunal if a company fails to repay a deposit or interest.
• Section 76 lets certain public companies accept deposits from non-members, with a credit rating each year and a charge within thirty days for secured deposits.

Common mistakes

• Treating debentures and bonds as legally different instruments in all cases. Fix: Say they are similar debt instruments; bonds are the term usually used by governments and large institutions, debentures by companies.
• Calling debenture holders owners or shareholders. Fix: Debenture holders are creditors. They get interest whether or not there is profit and usually have no voting rights.
• Saying the Board can borrow without any member approval in all cases. Fix: Always run the section 180(1)(c) ceiling test before concluding.
• Leaving out securities premium from the ceiling. Fix: Use the current aggregate: paid-up share capital, free reserves and securities premium.
• Saying debentures can carry voting rights if members agree. Fix: Quote s. 71(2): no company shall issue debentures carrying any voting rights. No resolution can override it.
• Requiring a special resolution for every debenture issue. Fix: The special resolution in s. 71(1) applies to debentures with an option to convert into shares. Plain non-convertible issues follow the other applicable approvals.
• Saying a private placement can be offered to any number of persons if money is paid by cheque. Fix: Always count identified persons against fifty (or the higher prescribed number), excluding QIBs and ESOP employees.
• Treating a private placement offer as renounceable. Fix: Remember the proviso to section 42(3): a private placement offer and application carries no right of renunciation.
• Saying the loan becomes unrecoverable if the charge is not registered. Fix: Write that the charge is not taken into account by the liquidator or other creditors, but the contract for repayment is not prejudiced.
• Counting the 30 days from the date of the loan agreement or from disbursement. Fix: Count from the date of creation of the charge, as stated in section 77(1).

Exam tips

• For list questions, give each source a one-line definition plus two features. Do not write only names.
• Always end comparison answers with a recommendation tied to the facts given.
• Keep a ready table-style structure in sentences: ownership, cost, tax, risk, control, repayment for debt vs equity.
• For ECB, mention foreign currency, RBI and FEMA framework and exchange risk. Link to the ECB topic for detail.
• In calculation questions, show the formula and each step so you earn method marks.
• Always show the arithmetic of the section 180(1)(c) test; examiners award marks for it.
• Quote the three heads in the aggregate: paid-up share capital, free reserves and securities premium.
• Follow the format: provision, facts, conclusion, then a drafting point such as the resolution wording.