Introduction: On January 3, 2024, the Reserve Bank of India (RBI) introduced the Master Directions concerning Commercial Papers (CPs) and Non-Convertible Debentures (NCDs) of original or initial maturity up to one year. Coming into effect on April 1, 2024, these directions aim to streamline the issuance and investment process for CPs and NCDs, setting a clear framework for eligibility, issuance, investment, and compliance requirements. This initiative reflects RBI’s commitment to enhancing transparency, investor protection, and systemic stability in the short-term debt market.
Issuer issuing CPs and NCDs upto one year shall abide by the provisions of any direction, regulation, or guideline issued by any other regulator or authority, that may be applicable, in respect of issue of or investment in CPs and NCDs, provided that such directions, regulations or guidelines do not conflict with these Directions. In case of any conflicts, the provisions of these Directions shall prevail.
KEY HIGHLIGHTS ON MASTER DIRECTIONS:
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Who are eligible to issue CP/NCDs? |
(i) Companies;
(ii) NBFCs, including Housing Finance Companies (HFCs); (iii) InvITs and REITs; (iv) All India Financial Institutions (AIFIs); (v) Any other body corporate with a minimum net-worth of ₹100 crore, provided that the body corporate is statutorily permitted to incur debt or issue debt instruments in India; and (vi)Any other entity specifically permitted by the Reserve Bank. b) Co-operative societies and limited liability partnerships with a minimum net-worth of ₹100 crore, may also issue CPs under these Directions; Issuers’ borrowing accounts shall be classified as standard at the time of issue of CPs and NCDs; |
| Who can invest in CP/NCDs? | (i) All residents are eligible to invest in Commercial Papers (CPs) and Non-Convertible Debentures (NCDs).
(ii) Non-residents are eligible to invest in CPs and NCDs to the extent permitted under FEMA or the rules framed under. Further no person, resident or non-resident, can invest in CPs and NCDs issued by related parties either in primary or secondary markets; |
| What are minimum denominations of CP/NCDs? | CPs and NCDs are issued in dematerialized form and held with a depository registered with SEBI. They shall be issued in a minimum denomination of ₹5 lakh and in multiples of ₹5 lakh thereafter at a discount or fixed / flexible coupon rate ; |
| What are tenor & settlement dates? | (i) The tenor of a CPs cannot be less than seven days or more than a year.
(ii) The tenor of an NCD cannot be less than 90 days or more than one year. It is not allowed to issue these CPs/NCDs with options. The settlement must be done within a period not exceeding T+4 working days where T represents the deal date; |
| What are the purpose for which proceedings of CPs and NCDs can be used? | The funds raised through CPs and NCDs shall be used to finance current assets and operating expenses. In case funds to be used for any other purpose then it shall be stated in the offer documents.
A certificate shall be obtained from CEO / CFO and provided to IPA within 3 months of issue of CPs/ NCDs; |
| Credit rating requirement for issuer? | A3 credit rating for the issuance of CPs and NCDs; |
| Whether Buy back of CPs and NCDs permitted? | Yes, Buyback of CPs and NCDs is permitted at prevailing market price subject to following:
(i) CPs can be buyback only after 7 days from the issue of CPs; (ii) NCDs can be buyback only after 90 days from issue of NCDs; (iii) Details of buyback shall be sent to IPA and to the debenture trustee (whenever applicable); (iv) CPs and NCDs bought back shall be extinguished on the date of buyback. |
| Other points w.r.t. issuance of CPs/NCDs | (i) Issuance of a CP/NCD with Call and put options is not permitted.
(ii) CPs and NCDs shall be issued in dematerialized form and held with a depository registered with SEBI. (iii) Issuance of a CP/NCD is not permitted to be underwritten or co-accepted; (iv)The offer documents for the issue of CPs and NCDs shall include all other disclosures as required as per the direction; |
Other General Conditions for issuance of CPs/NCDs:
a. Credit Enhancement:
(i) The banks and AIF may provide with stand-by assistance/credit, back-stop facility, etc., by way of credit enhancement for an issue of CPs/NCDs.
(ii) The Non-bank entities (including corporates) may provide the unconditional and irrevocable guarantee by a group entity for issue of CP/NCDs, subject to making appropriate disclosure.
b. Primary Market – Other Conditions:
(i) An IPA shall be appointed for the issuance of CPs and NCDs;
(ii) For issue of NCDs a Debenture Trustee shall also be appointed;
(iii) The subscription to the primary issue of a CPs/NCDs shall be routed through the IPA;
(iv) The aggregate amount of CPs and NCDs that can be issued by an issuer shall be subject to:
a) such limits as approved by BOD or its equivalent body and
b) The limits specified by regulators where an issue is regulated by a financial sector regulator.
c. Secondary Market-Trading venue and settlement:
(i) CPs and NCDs shall be traded either in OTC markets or on recognized stock exchanges, approved by the Reserve Bank for the purpose.
(ii) The settlement cycle for OTC trades in CPs and NCDs shall be either T+0 or T+1.
(iii) All OTC secondary market transactions in CPs shall be settled on a Delivery versus payment basis through the clearing corporation.
(iv) All OTC secondary market transactions in NCDs shall be settled bilaterally, or on a Delivery versus payment basis.
d. Repayment of CPs / NCDs:
(i) Issuer shall make repayment including coupon payment on redemption date before 03:00 P.M. to IPA and there shall be no grace period for same.
e. Default:
Issuer who has defaulted to make full payment for redemption of CPs and NCDs shall inform the details of such default to IPA before 05:00 P.M. further NCDs issuer shall also inform same to Debenture Trustee.
In case conversion of CPs and NCDs into any other financial instrument it shall stand extinguished on date of conversion. Details of conversion shall be informed to IPA and Debenture Trustee
In event of default in repayment of CPs / NCDs the issuer shall not be allowed to issue CPs or NCDs till payment of defaulted obligation or six months after date of default whichever earlier.
f. Market Timings:
Primary issuance and secondary market trading hours shall be between 9:00 AM and 5:00 PM on a working day or as specified by the Reserve Bank from time to time
The disclosure as required in the offer documents for issuance of CP and NCDs are more specifically provided under the master circular of RBI the reference link of the same is provided herewith for your reference: https://taxguru.in/rbi/rbi-master-direction-commercial-paper-non-convertible-debentures-2024.html
Conclusion: The RBI’s Master Directions for Commercial Papers and Non-Convertible Debentures mark a significant step towards regulating short-term debt instruments, ensuring a robust and transparent framework for their issuance and investment. By clarifying eligibility criteria, investment norms, and compliance requirements, these directions are poised to foster a more disciplined and orderly market for CPs and NCDs. As the financial landscape continues to evolve, these directions will play a crucial role in supporting the growth and stability of the short-term debt market, ultimately contributing to the broader objective of financial stability and market integrity.
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Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement
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