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.

Online GST Certification Course by TaxGuru & MSME- Click here to Join

 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
  • Individuals, banks, Primary Dealers (PDs), other corporate bodies including insurance companies and mutual funds and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).
  • Investments by FIIs shall be within limits set by SEBI.
Corporate eligible to issue NCD A Corporate will be eligible to issue NCD if –

  • It has tangible net worth of Rs.40 million or more as per latest audited
    balance sheet;
  • It has been sanctioned working capital limit / term loan by a bank or all?
    India financial institution; and
  • It?s borrowal account is classified as a Standard Asset by the financing banks or institutions.
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
  • Minimum maturity – not less than 90 days from date of issue
  • Exercise date of option (put / call), if any – not to fall within the period of minimum maturity period i.e. 90 days
  • Maximum maturity – not to exceed the validity period of credit rating of the instrument
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
  • Corporate to obtain certificate from the auditor that it is eligible to issue NCDs under in the Directions.
  • Issuance of NCDs should be in accordance with the provisions of the Companies Act,    1956, SEBI         (Issue and         Listing     of     Debt Securities) Regulations, 2008, or any other law, that may be applicable.

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:

(i)  Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010 & Circular no. IDMD.DOD.10/11.01.01(A)/2009-10 dated 23 June 2010 issued RBI; and

(ii) RBI press release dated 3 November 2009.

More Under Fema / RBI

Posted Under

Category : Fema / RBI (3274)
Type : Articles (14577)
Tags : NCD (7)

Comments are closed.