Raising capital through debt instruments is an important financing option for businesses seeking growth without relinquishing ownership. In Nigeria, one of the formal debt instruments available to private companies is the Debenture.
A Debenture is a loan instrument issued by a company, promising to pay a fixed sum with interest after a specific period. It is commonly used to raise medium to long-term funding and may be secured against company assets or remain unsecured.
This article provides a comprehensive step-by-step explanation of how private companies in Nigeria can issue debentures, the legal requirements, and key considerations involved.
Overview of Debentures
Debentures provide companies with an alternative means of raising capital without giving up equity. They also offer investors a structured way to earn regular interest income, with varying levels of risk and return depending on the type of debenture.
Under Nigerian corporate law, a debenture outlines the terms of repayment and interest, and may be secured or unsecured. Unlike shares, debentures do not confer ownership rights; instead, they are debt instruments used by companies to raise capital without decreasing control.
Debentures are governed primarily by the Companies and Allied Matters Act (CAMA) and regulated by the Securities and Exchange Commission (SEC) when offered to the public or qualified investors. They are a popular financing tool for both public and private companies in Nigeria, offering flexible terms and potential tax advantages.
Common Types of Debentures in Nigeria
1. Secured Debentures
These are backed by specific assets of the company, such as land, buildings, or equipment. The security may take the form of fixed charges, which are attached to specific assets, or floating charges, which are attached to a class of assets that may change over time (e.g., inventory).
2. Unsecured Debentures
This type of Debenture has no collateral backing and relies solely on the creditworthiness and reputation of the company. Investors take on higher risk but may be compensated with higher interest rates.
3. Convertible Debentures
These offer investors the option to convert the debenture into equity shares of the company after a certain period or upon reaching agreed conditions. This combines the benefits of debt and potential ownership.
4. Redeemable Debentures
Issued with a defined maturity date, these debentures are repaid on a specified future date or after a notice period. They are often used for planned capital projects with predictable cash flows.
5. Irredeemable (Perpetual) Debentures
These are not repayable during the company’s lifetime and are usually only settled during winding up or liquidation. They provide long-term capital but can be riskier for investors.
Eligibility Criteria for Private Companies to Issue Debt Securities to the Public in Nigeria
Under the recently proposed SEC Rules on the Issuance of Securities by Private Companies, only private entities that meet specific conditions can issue debt securities, such as bonds or debentures, to the public. These criteria are designed to ensure that only financially stable and credible companies can access public debt markets.
To qualify, a private company must:
- Be duly incorporated and operational: The company must be registered under the Companies and Allied Matters Act (CAMA) 2020 or other applicable Nigerian laws and must have maintained active operations for at least three years.
- Maintain a clean debt repayment record: The company must not have defaulted on interest payments or repayment of principal from previous debt instruments for more than six months.
- Operational Track Record: The company must have an operational track record showing at least three years of continuous business operations. If not, the company must provide a creditworthy guarantor.
- Obtain a credit rating for the bond: Debt instruments offered to the public must be rated by a recognized credit rating agency.
- Ensure investment-grade rating: The bond must carry a rating not lower than investment grade, signifying a relatively low risk of default.
- Secure all relevant regulatory approvals: In addition to SEC approval, the company must obtain and file all necessary consents or approvals from other regulatory bodies that govern its sector or business activity.
- Issuance Threshold: The annual cumulative debt issuance must not exceed ₦15 billion. If it does, the company will be required to convert to a public company in accordance with SEC regulations.
These conditions help safeguard investor interests and maintain confidence in Nigeria’s private capital market. Companies that meet these standards are seen as more credible and better positioned to meet their financial obligations.
Step-by-Step Guide to Issuing Debentures in Nigeria
Issuing debentures in Nigeria involves both legal and regulatory steps designed to ensure compliance with the Companies and Allied Matters Act (CAMA 2020) and the Securities and Exchange Commission (SEC) Rules. Below is a simplified breakdown of the key steps involved:
1. Review MEMART and Legal Framework
Begin by reviewing your company’s Memorandum and Articles of Association (MEMART) to ensure it grants the power to borrow money and issue debentures. If these powers are absent or limited, the company must amend the MEMART by passing a special resolution at a general meeting. It’s best to engage a corporate lawyer to guide the amendment process
2. Secure Board and Shareholder Approvals
The private company’s Board of Directors must pass a resolution approving the proposed debt issuance, including the type, size, interest rate, tenure, and structure of the debenture.
The Shareholders may also need to approve the issuance, especially where it affects existing rights or requires amendments to MEMART. The company should also appoint relevant professional advisers, such as Issuing House, Solicitors, Trustees, or Auditors, who will handle structuring, documentation, regulatory filings, and investor coordination.
3. Structure the Debenture Offering
Define the commercial and legal terms of the debenture, including:
- Type of offering: Decide whether the debenture will be issued through a private placement or a public offer, in line with SEC rules.
- Security status: Determine whether the debenture is secured (by fixed or floating assets) or unsecured.
- Convertibility: Indicate whether the debenture will be convertible into equity shares or remain a straight debt instrument.
- Redemption terms: Outline repayment dates, early redemption clauses, and any sinking fund requirements.
4. Prepare Documentation
For public debt offerings now governed by the SEC’s updated Rules, issuers must compile and submit a set of mandatory documents to initiate the approval process. These documents are important for regulatory compliance and investor transparency. They include:
- Form SEC 6, which is the official registration form for securities issuance.
- A detailed draft prospectus outlining the nature of the debenture, terms of the offer, risk factors, and company information.
- A Trust Deed/ agreement between the issuer and a trustee representing the interests of debenture holders, especially where the debenture is secured.
- A vending agreement between the issuer and the issuing house (or vendor) outlining the terms for marketing and selling the securities.
- Audited Financial Statements covering the last three years of the issuing company.
- Board and Shareholder Resolutions evidencing proper corporate authorization to proceed with the issuance.
- Offer Documents or a detailed breakdown of how the funds raised will be used
5. Engage Registered Capital Market Operators
Only capital market professionals registered with the Securities and Exchange Commission (SEC) are permitted to participate in a public debt issuance. The issuing company must appoint the following parties:
- Issuing House to manage the structuring, marketing, and distribution of the debt securities.
- Trustee to represent the interests of the debenture holders, especially in secured or convertible debentures.
- Solicitors to handle legal documentation, regulatory filings, and due diligence;
- Auditors and Reporting Accountants: Prepare and verify financial statements and forecasts.
Working with SEC-licensed professionals ensures regulatory compliance, market integrity, and investor protection throughout the issuance process.
6. Register the Offer with the SEC
Once all preparatory work is completed, the company must submit the full application package to the Commission (SEC), including all documents listed above and evidence of payment of applicable SEC registration and processing fees
The Commission will review the submission to ensure compliance with regulatory standards. For a public offering to be successful, at least 50% of the offered amount must be subscribed by qualified investors. If the offer fails to meet this threshold, it is considered unsuccessful and must be aborted and formally reported to the SEC.
7. Register Charges with the Corporate Affairs Commission (CAC) For Secured Debentures
Where the debenture is secured by company assets (fixed or floating charges), the company must register the charge with the Corporate Affairs Commission (CAC) within 90 days of creating the charge.
Failure to register within this period renders the charge void against third parties, including potential future creditors and liquidators. However, proper registration protects both the company and debenture holders by giving priority and legal enforceability in case of default or insolvency.
8. Issue Debenture Certificates and Allot Securities
Once the offer is deemed successful and regulatory approval is granted, the company must formally issue and allot the debentures to the subscribers.
Each debenture certificate must clearly state:
- Name of the holder
- Principal amount subscribed
- Tenure (maturity period)
- Interest rate and payment frequency
- Redemption clause
9. Ensure Ongoing Compliance and Reporting
Post-issuance, the company must maintain strict regulatory compliance by filing quarterly and annual reports with the SEC, including financial performance, material changes, and compliance updates.
The company must also submit allotment reports detailing the allocation of debentures to investors and adhere to the SEC-approved Code of Conduct applicable to issuers of debt securities.
Are There Restrictions to the Issuance of Debentures by Private Companies in Nigeria?
Yes, there are, and they include the following:
- Private companies must not offer, sell, or allot debt securities to the public without prior SEC registration and approval from a recognized securities exchange. This ensures investor protection and regulatory oversight.
- Only standard instruments such as plain vanilla bonds/debentures, sukuk, and other approved debt securities may be issued under these rules.
- Debt securities can only be sold to qualified investors, protecting retail or inexperienced investors from high-risk private debt offerings.
- A private company is restricted to a maximum of three debt issuances per year, with a combined cap of ₦15 billion annually. If the company intends to exceed this limit, it must convert to a public company.
- Only SEC-registered capital market operators (e.g., trustees, solicitors, issuing houses) can participate in debt issuances under these rules.
- Securities issued through public offers must only be traded on SEC-registered securities exchanges, ensuring transparency and investor confidence in the secondary market.
Conclusion
Issuing debentures in Nigeria requires more than just financial intention. It requires strategic legal and regulatory guidance. To ensure a smooth, compliant, and successful issuance process, companies must engage experienced corporate lawyers and capital market professionals.
Engaging a professional is important for proper offer structuring, timely documentation and registration, risk mitigation, and full compliance with SEC and CAMA requirements. Ultimately, their expertise helps protect the company’s interests, enhances investor confidence, and ensures the long-term credibility of the transaction.
By Resolution Law Firm Team
Email: info@resolutionlawng.com
