Subordinated debentures – A Capital Supporting Instrument

Non Banking Financial Companies (NBFCs) in India are always seeking sources of raising funds. Capital is costly and therefore NBFCs rely more on public funds. Public funds as defined under theSystemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 (the “2015 Directions”) include funds raised directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and bank finance but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue.

Debentures can be classified into various types based on several parameters viz. transferability, convertibility, tenure, public participation, security, seniority, coupon and rate of return. On the basis of seniority, debentures can be classified as Senior debt and Subordinated debt. Subordinated debt is even included for meeting regulatory capital requirements.

This post discusses the statutory provisions for subordinated debt, features, rights of subordinated debt holders as reflected in the information memorandum of NBFCs/ Banks issuing and listing the same and international practice.

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About AIWMI

The Association of International Wealth Management of India (AIWMI) is a not-for-profit organization and a globally recognized membership association for finance professionals. AIWMI primarily focuses on the broad and strategic role of developing a more robust and forward-looking training infrastructure for the financial services sector and to promote more active industry involvement and collaboration in training and continuing education. AIWMI is offering advanced international certification programs along with a wide variety of high-quality executive education programs. AIWMI programs combine state-of-the-art knowledge and skills with practical experience and insights into the functioning of the financial sector. All AIWMI courses and educational events have an intense and pragmatic curriculum. Participants are exposed to the latest developments within the financial services sector. AIWMI plays a key role in guiding the development of the financial services sector. AIWMI works with key industry participants’ viz. the Government, the Regulators, the Industries/Associations, the Corporate, the Media and the General Public to achieve its objectives. Besides enhancing technical competence and professionalism in the industry, AIWMI organizes events and facilitates discussions to promote best practices in leadership and talent development in the financial sector with an aim to become Asia’s premier center of excellence for financial education.

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