Introduction to RBI Master Directions Issued on January 3, 2024
The Reserve Bank of India (RBI), a regulatory authority in Indian banking, issued new master directions on January 3, 2024. In an increasingly globalized world, understanding regulations can help you in making informed financial decisions.
Highlights of the New RBI Master Directions
To kick things off, let’s delve into the key changes made in the banking regulations, financial guidelines for banks and financial institutions, and the impact on the Indian banking system, as mandated by the RBI’s master directions announced on January 3, 2024.
These newly issued RBI’s master directions for short term money market instruments such as Commercial paper and Non Convertible debentures of less than a year time, shall supersede 2017 master direction on money market instruments, commercial paper directions and 2016 NBFC acceptance of public deposit rules.
Discover the key takeaways from RBI’s Master Directions issued on January 3, 2024. Stay in the know about important banking regulations and financial guidelines that affect us all
Master Directions1 were issued by RBI on January 3, 2024 superseded
1. Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016,
2. Any provision issued by other regulator such as SEBI, in conflict with this master directions.(refer para 11 dealing with conflict of law.)
3. Master Directions on Money Market Instruments
4. Reserve Bank Commercial Paper Directions, 2017
Key takeaways
1. Master Directions is applicable to short term CPs and NCDs of less than one year.
2. Short term NCDs is to be secured in nature only.
3. Definition of related party is in accordance with AS-24.
4. Short term NCDs shall be secured in nature
5. Minimum denomination of CPs and short term NCDs is to be 5 lakhs
6. Offer document to include credit enhancement including backstop facilities extended by Group entities.
7. IPA need to be appointed for issuance of short term NCDs
An outline of the Master Directions vis-à-vis changes in the existing framework is detailed below.
| Sr. No. |
Heading |
Master Directions | Remarks |
| 1 | Commercial Paper |
Commercial Paper (CP) means an unsecured money market instrument issued in the form of a promissory note. |
No Change |
| 2 | NCDs | Non-Convertible Debenture (NCD) means a secured money market instrument with an original or initial maturity upto one year. | Short term NCDs is to be secured in nature |
| 3 | Related Party | Related parties shall have the same meaning as assigned to it under Indian Accounting Standard (Ind AS) 24 – Related Party Disclosures or International Accounting Standard (IAS) 24 –Related Party Disclosures or any other equivalent accounting standards. | Definition of RP aligned with AS-24 instead of section 2(76) of CA, 13 |
| 4 | Eligible investors | Non-residents are eligible to invest in CPs and NCDs to the extent permitted under Foreign Exchange Management Act (FEMA), 1999 or the rules/regulations framed thereunder. | Investors cannot invest in CPs and NCDs issued by related parties |
| 5 | Demat | CPs and NCDs shall be issued in dematerialised form and held with a depository registered with SEBI. | Provision has not specified about the existing bonds issued in physical form |
| 6 | Minimum Denominations | CPs and NCDs shall be issued in minimum denomination of ₹5 lakh and in multiples of ₹5 lakh thereafter. | Conflict with SEBI Circular. In this case it face value per instrument is to be denominated as 5 Lakhs. |
| 7 | Offer Documents | The offer documents for the issue of CPs and NCDs shall, at the minimum, include disclosures as given in Annex I. | Need to comment on Unaccepted credit ratings
All details of credit enhancement including backstop facilities provided by the group entity 6including but not |
| 8 | Individual Subscription | Total subscription by all individuals, including Hindu Undivided Families, in any primary issuance of CPs or NCDs shall not exceed 25 per cent ofthe total amount issued | Capped maximum upto 25% of total amount |
| 9 | Coupon rate of NCDs | The coupon on floating rate NCDs shall be linked to a benchmark | |
| 10. | END Use | Funds raised through CPs and NCDs shall ordinarily be used to finance current assets and operating expenses. The end-use of the funds raised through a CP or an NCD shall be disclosed in the offer document | Need to tag along the disbursement vis-à-vis issuance for compliances |
| 11 | IPA | An IPA shall be appointed for each issuance of a CP and an NCD | For short term NCDs appointment of IPA is mandatory. |
| 12 | Repayment of CPs / NCDs | funds for redemption to be made available to the IPA by 3:00 P.M. on the redemption date. | – |
| 13 | Credit Enhancements | Bank & AIFI may provide backstop facilities subject to prudential guidelines.
Non bank entities may provide unconditional and irrevocable credit enhancement to group entities |
– |
| 14 | Buyback | Minimum Tenure- after 7 days for CPS and after 90 days for NCDs Price- at prevailing market price. | – |
Steps to ensure compliance with the new regulations
Complying with the new RBI Master Directions requires careful planning and process implementation. Here are some steps for financial institutions to ensure compliance:
1. Understanding and interpreting the new guidelines in the context of their operations.
2. Conducting an internal audit to identify gaps in current procedures.
3. Modifying or developing new processes as per the new requirements.
4. Training staff on the new regulations to ensure they are well versed with them.
5. Regular monitoring and reviewing of systems to ensure continuing compliance with the new guidelines.
6. Issuer to submit end use certificate signed by CEO/CFO within three months of issuance or on maturity, whichever is earlier.
7. CFO certificate is required to be submitted to IPA for CPs and NCDs.
8. To obtain credit ratings for issuance of CPs/NCDs.
9. Minimum Credit rating for these instrument is to be A3.
10. The issuer shall make the funds for redemption available to the IPA by 3:00 P.M. on the redemption date.
11. In the event of default in payment, Issuer need to intimate it before 5.00 PM in the website and also in FTRAC of CCIL platform.
Notes:-
1 (https://taxguru.in/rbi/rbi-master-direction-commercial-paper-non-convertible-debentures-2024.html)
2 12. Non-applicability of Certain Other Directions: Nothing contained in the Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016, as updated from time to time, shall apply to the aising of funds by issuance of CPs, by any NBFC when such funds are raised in accordance with these Directions (https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10563) (refer para 12 produced above which starts with non obstinate clause)
3 11. Applicability of other laws, directions, regulations or guidelines: Participants in the CP and NCD markets 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.
4 (https://taxguru.in/rbi/master-direction-rbi-call-notice-term-money-markets-directions-2021.html)
5 (https://taxguru.in/rbi/reserve-bank-commercial-paper-directions-2017.html)
6 Group entities means an arrangement involving two or more entities related to each other through any of the following relationships: (a) subsidiary – parent (defined in terms of Ind-AS 110/AS 21); (b) joint venture (defined in terms of Ind-AS 28/AS 27) ; (c) associate (defined in terms of Ind-AS 28/AS 23); (d) Promoter-promotee (as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997) for listedc ompanies; (e) common brand name or (f) investment in equity shares of 20 per cent and above.
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