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.