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Introduction:

Money market instruments play a pivotal role in fulfilling working capital requirements of corporates by facilitating acquisition of short-term financing and thereby establishing liquidity across diverse financial markets. The Reserve Bank of India (RBI), as the regulator of the financial market, lays down the regulatory landscape for the growth of these markets. In its most recent stride, with an aim to streamline the regulatory framework on money markets instruments, RBI released the Master Direction – Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of original or initial maturity up to one year) Directions, 2024 (Master Directions) on January 03, 2024.

Under the Master Directions, a non-convertible debenture (‘NCD’) has been defined to mean only a secured money market instrument with an original or initial maturity up to one year. Under the old regime, the definition included a debt instrument issued by a corporate with an original or initial maturity up to one year and issued by way of private placement. On the other hand, the definition of commercial papers remains the same, except that there is no minimum maturity for the same prescribed now.

The issuance of NCDs by Non-Banking Financial Companies (‘NBFCs’) is governed by the RBI Master Directions and specific provisions in the Companies Act, 2013. Below is a comprehensive overview of the regulations, highlighting the points that are applicable specifically to listed companies.

Also Read: Voluntary Delisting of Non-convertible Debt Securities or Non-convertible Redeemable Preference Shares

Regulatory Framework

• RBI Master Direction – Non-Banking Financial Company (Scale Based Regulation) Directions, 2023;
• Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of original or initial maturity up to one year) Directions, 2024; and
• Section 42 and 71 of the Companies Act, 2013.

Eligible issuers:

The guidelines are effective from April 01, 2024, and NCDs may be issued by the following entities subject to the condition that all fund-based facilities availed, if any, by the issuer from banks/AIFIs/NBFCs are classified as Standard at the time of issue:

1. Companies;
2. NBFCs, including Housing Finance Companies (HFCs);
3. InvITs and REITs;
4. All India Financial Institutions (AIFIs);
5. 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
6. Any other entity specifically permitted by the Reserve Bank.

Eligible Investors:

Residents and Non-Residents (as per the Foreign Exchange Management Act, 1999 and related regulations) can invest in NCDs. However, related parties are not allowed to invest in the primary or secondary markets for NCDs issued by related entities.

 Issue Requirements:

• NCDs must be issued in dematerialized form through depositories registered with the SEBI.
• Minimum denomination is INR 5 Lacs, and further issuances must be in multiples of
  INR 5 Lacs.
• The minimum tenor for NCDs is 90 days, while the maximum is 1 year (for short-term NCDs).
• NBFCs must maintain a minimum capital adequacy ratio of 15%. For secured NCDs, the security provided influences the risk-weight calculation for capital adequacy.
• The leverage ratio (total outside liabilities divided by owned funds) must not exceed 7 at any point in time.
• NCDs can be issued either at a discount to face value or with a fixed or floating rate coupon. Floating rate coupons must be linked to benchmarks published by an authorized Financial Benchmark Administrator (FBA).
• Must obtain a minimum credit rating of ‘A3’ from a SEBI-registered Credit Rating Agency (‘CRA’) to issue NCDs. Any downgrade in the rating must be disclosed in the offer document.
• Must include disclosures such as details of outstanding debt, credit rating, debenture trustee, end-use of funds, and any defaults. The format for the offer document is specified in Annex I of the RBI Master Directions.
• A Debenture Trustee, registered under SEBI (Debenture Trustees) Regulations, 1993, must be appointed for each NCD issuance. The trustee ensures compliance with the terms of the NCDs and safeguards the interests of investors.
• The total subscription by individuals in any primary issuance must not exceed 25% of the total issue amount.
• The issuance process, including payment of funds and issuance of securities, must be completed within T+4 working days, where T represents the deal date.
• The funds raised through NCDs should typically be used to finance current assets and operating expenses. Any deviation from this must be clearly stated in the offer document.

Reporting and Disclosure Requirements:

• The depositories shall report to the Reserve Bank, the details of the CPs and NCDs held with them in the dematerialised form, in the prescribed format furnished in Annex II of the RBI Direction, at fortnightly intervals (on the 15th day and on the last day of the month) or as and when called upon to do so by the Reserve Bank.
• The Debenture Trustee shall report the details of the outstanding amount of NCDs and the particulars of default in repayment of NCD, at quarterly intervals (within 15 days from the end of the quarter), in the format prescribed in Annex III to the Reserve Bank through e-mail (reportfmd@rbi.org.in).
• Private placement filings, including the issuance and board resolutions, must be reported to the Registrar of Companies (ROC) via Form PAS-3.

Buyback of NCDs:
Issuers are permitted to buy back NCDs before maturity, subject to the following conditions:

1. Buyback can occur only after 90 days from the date of issuance.
2. The buyback must be offered to all investors on the same terms and be conducted at the prevailing market price.

Violation of the RBI Directions: 

In the event of any person violating any provision of these Directions, the Reserve Bank may, in addition to taking any penal or regulatory action in accordance with law, disallow that person from participating in the CP and NCD markets for a period not exceeding one month at a time, after providing reasonable opportunity to the entity to defend its actions, and such action would be made public by the Reserve Bank.

Conclusion:

The issuance of NCDs by NBFCs is governed by a robust regulatory framework under the Companies Act, 2013 and RBI Directions. NBFCs must adhere to guidelines related to credit ratings, disclosure requirements, and investor protection to ensure a compliant and successful issuance process. By meeting these regulations, private NBFCs can utilize NCDs as a secure and effective mechanism for raising capital.

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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