NCD Private Placement in India: Process, Cost and Rules

A non-convertible debenture, or NCD, is a loan cut into transferable pieces. Instead of one bank lending on its own terms, your company issues debentures to a small group of investors on terms you negotiate: coupon, tenor, repayment shape, security and covenants.

For a mid-sized company with a rating and a clear use of funds, privately placed NCDs can offer flexibility a bank loan will not, such as bullet repayment. They also bring a heavier compliance load. This guide covers when NCDs make sense, the Companies Act steps, the extra layer for listed issues, and the real cost.

When NCDs beat a bank loan

Banks prefer amortising loans, heavy collateral and close monitoring of working capital. NCD investors, such as private credit funds, family offices and some alternative investment funds, price the risk and accept structures a bank will not: bullet or back-ended repayment, interest paid at maturity, or lending at holding-company level.

The trade-off is cost and rigidity. Private credit usually costs more than bank debt for the same company, covenants are hard to amend once several holders are involved, and even a one-day delay on a rated NCD counts as a default for rating agencies. NCDs work best when the use of funds and the repayment source are clearly defined.

The Companies Act steps for a private placement

Every private placement runs through Section 42 of the Companies Act and Rule 14 of the Prospectus and Allotment of Securities Rules, while Section 71 governs debentures themselves. The board must also stay within its borrowing powers under Section 180, or get shareholder approval to go beyond them.

The offer can go to no more than 200 identified persons in a financial year, excluding qualified institutional buyers and employees under an ESOP scheme. A special resolution is needed, though for NCDs one resolution can cover all offers in the year, and a board resolution can be enough when the amount stays within the Section 180 limit.

Each investor gets a serially numbered offer letter in Form PAS-4, money must come through banking channels into a separate bank account, and allotment must happen within 60 days of receiving the money, or the money is refunded within the next 15 days. The return of allotment in Form PAS-3 is due within 15 days of allotment, and the resolution goes to the Registrar in Form MGT-14 within 30 days. No public advertisement is allowed.

Secured NCDs: trustee, trust deed and charge

Most privately placed NCDs are secured, because investors want a claim on assets. Under Rule 18 of the Share Capital and Debentures Rules, secured debentures generally cannot run beyond 10 years, with longer tenors allowed for specified infrastructure and similar companies.

A SEBI-registered debenture trustee must be appointed before the offer letter goes out, and a debenture trust deed must be executed within 60 days of allotment. The security is charged in the trustee's favour, and the charge is registered with the Registrar in Form CHG-9 within the time the Act allows.

The asset cover, the value of the security compared with the NCDs and interest, is a live covenant. If asset values fall you may have to top up security, so never pledge assets your working capital banks rely on without their consent.

Listed or unlisted: the extra layer

Many issuers list privately placed NCDs on the debt segment of a stock exchange, because listing widens the investor base and some investors can only hold listed paper. Listing brings in SEBI's Non-Convertible Securities Regulations: a credit rating from at least one registered agency, a debenture trustee, an ISIN, and offer documents in the General Information Document and Key Information Document format.

Larger issues must be placed through the stock exchange's electronic book provider platform, which applies when the issue size including any green shoe is Rs 50 crore or more. Listed issuers also contribute to a recovery expense fund, 0.01 percent of the issue size capped at Rs 25 lakh, and file periodic results and disclosures under the listing regulations.

Two points often surprise promoters. A company that lists only privately placed debt, and not its equity, is generally not treated as a listed company for Companies Act purposes under Rule 2A of the definition rules. But once any NCD is listed, SEBI rules generally require later NCD issues to be listed too. SEBI has also cut the minimum face value of privately placed NCDs in stages, which opens the door to smaller investors.

Who buys privately placed NCDs, and what they ask for

The buyers are mainly private credit funds, Category II alternative investment funds, family offices and NBFCs, and for higher-rated paper, mutual funds, insurers and banks. Each has its own mandate on rating, tenor, listing and security, so the investor list shapes the structure more than the issuer's wishes do.

Expect a term sheet covering coupon and any redemption premium, security and asset cover, financial covenants such as leverage and DSCR, limits on further borrowing and dividends, information rights, and events of default with acceleration. Private credit investors often add promoter guarantees, share pledges and cash flow escrows. Negotiate these line by line.

Redemption planning and the redemption reserve

Plan the repayment before you plan the issue. A bullet NCD concentrates risk into one date, so the board needs a credible refinancing or cash build-up plan well before maturity. Rating agencies look closely at this refinancing risk.

Unlisted companies other than NBFCs and housing finance companies generally must create a debenture redemption reserve of 10 percent of outstanding debentures out of profits, and many issuers must also deposit or invest at least 15 percent of the debentures maturing in the next year by 30 April. Check Rule 18 for your category before fixing the schedule.

Cost and timeline

The visible costs are the coupon, arranger fees, rating fees, debenture trustee fees, legal and documentation costs, depository charges, and for listed issues, exchange and platform fees. Stamp duty on the issue of debentures is 0.005 percent of the issue value, and the trust deed and security documents attract state stamp duty.

A first placement with a new rating, a new trustee and fresh investor negotiation usually takes a few months from mandate to allotment; a repeat issue by a rated, listed issuer can move in weeks. The slowest items are usually the rating, security creation and the investor's own due diligence.

Frequently asked questions

Can a private limited company issue NCDs?

Yes. A private company can issue NCDs by private placement to identified investors, within the offeree limit and other conditions of the Companies Act. It can also list privately placed NCDs under SEBI's rules without becoming a listed company for Companies Act purposes.

Is a credit rating mandatory for NCDs?

For listed NCDs, yes: SEBI requires a rating from at least one registered credit rating agency. For unlisted NCDs the law does not always require one, but most serious investors will not subscribe without it, and the rating largely decides the coupon.

How many investors can we approach in a private placement?

Not more than 200 persons in a financial year, excluding qualified institutional buyers and employees under an ESOP scheme. Each offer must go to identified persons through a numbered offer letter, with no public advertising.

Are NCDs cheaper than a bank loan?

Usually not for small and mid-sized companies. Bank debt is often the cheapest money a well-run business can get. NCDs earn their place through structure: bullet repayment, longer tenor, lighter collateral, or funding a purpose banks will not finance.

Related guides

• Private Placement vs Preferential Allotment
• Debt Syndication for Indian Businesses: A Practical Guide
• Debt syndication and NCD advisory