Issue of NCDs of maturity upto 1 year by agencies dealing in securities and money market instruments
Reserve Bank of India (RBI) has, on 23 June 2010, issued the Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010 (the Directions).
Background:It was observed that issuance of the NCDs with original maturity of less than 1 year was unregulated either by Securities and Exchange Board of India (SEBI) or Government of India (GOI). Further, these instruments were issued with call / put options embedded in it, which imparted a ‘demand-liability’ like character to these instruments.
Having regard to systemic implications and such instruments being money market instruments under the RBI Act, it was decided that RBI should regulate such instruments. Based on a report of an Internal Working Group comprising of SEBI representatives, RBI had issued draft guideline for public comments in November 2009. Keeping in view the feedback received on the draft guideline, RBI has issued the Directions.
Salient features of the Directions
| Applicability | The Directions are applicable to issue of NCD by a Corporate on or after 2 August 2010. |
| Definitions | Non-Convertible Debentures (NCD) – means a debt instrument issued by a corporate (including NBFCs) with original or initial maturity upto 1 year and issued by way of private placement.
Corporate – means a company as defined in the Companies Act, 1956 (including NBFCs) and a corporation established by any act. |
| Investor |
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| Corporate eligible to issue NCD | A Corporate will be eligible to issue NCD if –
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| Rating requirement | Compulsory. Specified minimum credit rating to be obtained from a credit rating or other agencies registered with SEBI or other credit rating agencies specified by RBI. |
| Minimum investment | Rs.500,000 (face value) and in multiple of Rs. 100,000. |
| Issue price & interest rate | NCDs may be issued at face value carrying a coupon rate or at a discount to face value as zero coupon instrument. |
| Maturity of NCD |
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| Debenture Trustee (DT) | Mandatory to appoint a DT registered with SEBI for each issuance of NCD. DT responsible for furnishing specified information to RBI from time to time. |
| Others |
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Analysis
- RBI has issued these Directions in exercise of powers vested in it under provisions of Section 45K, 45L, 45W and other applicable provisions of the RBI Act and other laws. The Direction could therefore apply to all companies issuing NCD.
- As per Section 45 –U (b) of the RBI Act, the term „money market instrument? is defined to include call or notice money, term money, repo, reverse repo, certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity upto one year as the Bank (i.e. RBI) may specify from time to time.’
Source:
(ii) RBI press release dated 3 November 2009.
