Affluence Advisory
Quick Summary
INTRODUCTION Optionally Convertible Debentures (OCDs) have emerged as a popular instrument for raising funds in both domestic and cross-border transactions. They offer the flexibility of debt with the optionality of equity conversion, making them attractive to investors and promoters alike. However
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FAQ :
OCDs are debt instruments that give investors the option to convert them into equity shares at a later stage, offering flexibility between debt and equity.
A common mistake is treating OCDs as pure debt instruments for foreign investment; they are classified as foreign direct investment (FDI) under FEMA and require compliance with the FDI Policy and specific rules.
Sections 42 (Private Placement) and 62(1)(c) (conversion into equity) of the Companies Act, 2013, are frequently not adhered to, leading to issues with filings like Form PAS-3.
Both the Companies Act and FEMA require conversions to be based on a valuation report from a registered valuer, SEBI-registered merchant banker, or Chartered Accountant, ensuring the conversion is at fair market value.
For secured debentures with maturity over 18 months, failing to appoint a trustee and register a charge with the ROC (Registrar of Companies) is a violation of Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014.
Yes, even if conversion is contractually agreed upon, a Board Resolution and sometimes a Shareholder Resolution under Section 62(1)(c) are required at the time of actual conversion, along with necessary filings with the ROC.
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