Issuance of Non-Convertible Debentures (R B I) Directions, 2010

The Reserve Bank of India, has given the final guidelines to the agencies dealing in securities and money market instruments regarding issuance of Non-Convertible Debentures (NCDs) of original or initial maturity up to one year.

1. NCDs are defined as

i. Non-Convertible Debenture (NCD) means a debt instrument issued by a corporate (including NBFCs) with original or initial maturity up to one year and issued by way of private placement;

ii. “Corporate” means a company as defined in the Companies Act, 1956 (including NBFCs) and a corporation established by an act of any Legislature

2.  who can issue NCDs

A corporate shall be eligible to issue NCDs if it fulfills the following criteria, namely,

i. the corporate has a tangible net worth of not less than Rs.4 crore, as per the latest audited balance sheet;

ii. the corporate has been sanctioned working capital limit or term loan by bank/s or all-India financial institution/s; and

iii. the borrowal account of the corporate is classified as a Standard Asset by the financing bank/s or institution/s.

3.  Rating Requirement

An eligible corporate intending to issue NCDs shall obtain credit rating for issuance of the NCDs from one of the rating agencies, viz., the Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd or such other agencies registered with Securities and Exchange Board of India (SEBI) or such other credit rating agencies as may be specified by the Reserve Bank of India from time to time, for the purpose.

The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

The Corporate shall ensure at the time of issuance of NCDs that the rating so obtained is current and has not fallen due for review.

4.  Maturity

NCDs shall not be issued for maturities of less than 90 days or beyond validity period of the credit rating of instrument from the date of issue.

The exercise date of option (put/call), if any, attached to the NCDs shall not fall within the period of 90 days from the date of issue.

5.  Denomination

NCDs may be issued in denominations with a minimum of Rs.5 lacs (face value) and in multiples of Rs.1 lac.

6.  Limits and the Amount of Issue of NCDs

The aggregate amount of NCDs issued by a corporate shall be within such limit as may be approved by the Board of Directors of the corporate or the quantum indicated by the Credit Rating Agency for the rating granted, whichever is lower.

The total amount of NCDs proposed to be issued shall be completed within a period of two weeks from the date on which the corporate opens the issue for subscription.

7.  Procedure for Issuance

The corporate shall disclose to the prospective investors, its financial position as per the standard market practice.

The auditors of the corporate shall certify to the investors that all the eligibility conditions stipulated by RBI are complied with.

The requirements of all the provisions of the Companies Act, 1956 and the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008, or any other law, that may be applicable, shall be complied with by the corporate.

The Debenture Certificate shall be issued within the period prescribed in the Companies Act, 1956 or any other law as in force at the time of issuance.  

NCDs may be issued at face value carrying a coupon rate or at a discount to face value as zero coupon instruments as determined by the corporate.

8.  Debenture Trustee

Every corporate issuing NCDs shall appoint a Debenture Trustee (DT) for each issuance of the NCDs.

Any entity that is registered as a DT with the SEBI under SEBI (Debenture Trustees) Regulations, 1993, shall be eligible to act as DT for issue of the NCDs only subject to compliance with the requirement of these Directions.

The DT shall submit to the Reserve Bank of India such information as required by it from time to time.

9.  Investment in NCD

all resident investors and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) are eligible to invest in NCDs.

Investments in NCDs by Banks/PDs shall be subject to the approval of the respective regulators.

Investments by the FIIs shall be within such limits as may be set forth in this regard from time to time by the SEBI.

10.  Preference for Dematerialisation

While option is available to both issuers and subscribers to issue/hold NCDs in dematerialised or physical form, they are encouraged to issue/ hold NCDs in dematerialised form. However, banks, FIs and PDs are required to make fresh investments in NCDs only in dematerialised form.

11.  Roles and Responsibilities of debenture trustees and rating agencies

Debenture Trustees

The roles, responsibilities, duties and functions of the DTs shall be guided by these regulations, the Securities and Exchange Board of India (Debenture Trustees) Regulations,1993, the trust deed and offer document.

The DTs shall report, within three days from the date of completion of the issue, the issuance details to the Chief General Manager, Financial Markets Department, Reserve Bank of India, Central Office, Fort, Mumbai-400001.

DTs should submit to the Reserve Bank of India (on a quarterly basis) a report on the outstanding amount of NCDs of maturity up to year.

The DTs are required to report immediately, on occurrence, full particulars of defaults in repayment of NCDs to the Financial Markets Department, Reserve Bank of India.

Credit Rating Agencies (CRAs)

Code of Conduct prescribed by the SEBI for the CRAs for undertaking rating of capital market instruments shall be applicable to them (CRAs) for rating the NCDs.

The CRA shall have the discretion to determine the validity period of the rating depending upon its perception about the strength of the issuer. Accordingly, CRA shall, at the time of rating, clearly indicate the date when the rating is due for review.

While the CRAs may decide the validity period of credit rating, they shall closely monitor the rating assigned to corporates vis-à-vis their track record at regular intervals and make their revision in the ratings public through their publications and website.

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(This update may be useful for both JAIIB (paper 1) and Treasury Management paper).

CHANGES IN GUDIELINES REGARDING PAYMENT OF INTEREST ON DEPOSITS CLOSED BEFORE MATURITY BUT WHICH ARE REINVESTED.

As per extant instructions banks are required not to levy any penalty in case of deposits closed before maturity provided the same are reinvested with the same bank for a period exceeding the unexpired period of the earlier deposit.Recently RBI had changed the guidelines and left this to the discretion of the individual banks taking into account their Asset liability Management considerations.

Repo in Corporate Debt Securities (R BI) Directions, 2010

RBI had permitted with effect from March 01, 2010 repo in Corporate Debt Securities.

2. Definitions

a. ‘Corporate Debt Security’ means non-convertible debt securities, which create or acknowledge indebtedness, including debentures, bonds and such other securities of a company or a body corporate constituted by or under a Central or State Act, whether constituting a charge on the assets of the company or body corporate or not, but does not include debt securities issued by Government or such other persons as may be specified by the Reserve Bank, security receipts and securitized debt instruments”

b. ‘Security Receipts’ means a security as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002)

c. ‘Securitized debt instrument’ means securities of the nature referred to in sub-clause (i.e.) of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956(42 of 1956).

3. Eligible securities for repo in Corporate Debt Securities

a. Only listed corporate debt securities which are rated ‘AA’ or above by the rating agencies, that are held in the security account of the repo seller, in demat form, shall be eligible provided that Commercial Papers (CPs), Certificates of Deposit (CDs) and other instruments including Non-Convertible Debentures (NCDs) of less than one year of original maturity, shall not be eligible securities for undertaking repo.

4. Eligible Participants 

The following entities shall be eligible to undertake repo transactions in corporate debt securities:

a. Any scheduled commercial bank excluding RRBs and LABs; b. Any Primary Dealer authorised by the Reserve Bank of

India;c. Any non-banking financial company registered with the

Reserve Bank of India (other than Government companies as defined in section 617 of the Companies Act, 1956);

d. All-India Financial Institutions, namely, Exim Bank, NABARD, NHB and SIDBI;

e. Other regulated entities, subject to the approval of the regulators concerned, viz.,

i. Any mutual fund registered with the Securities and Exchange Board of India;

ii. Any housing finance company registered with the National Housing Bank; and

iii. Any insurance company registered with the Insurance Regulatory and Development Authority

f. Any other entity specifically permitted by the Reserve Bank

5. Tenor

Repos in corporate debt securities shall be for a minimum period of one day and a maximum period of one year. 

6. Trading 

Participants shall enter into repo transactions in corporate debt securities in the OTC market. 

7. Reporting of Trades 

a. All repo trades shall be reported within 15 minutes of the trade on the FIMMDA reporting platform.

b. The trades shall also be reported to any of the clearing houses of the exchanges for clearing and settlement. 

8. Settlement of trades 

a. All repo trades in corporate debt securities shall settle either on a T+1 basis or a T+2 basis under DvP I (gross basis) framework. 

b. Repo transactions in corporate debt securities shall settle in the same manner as outright OTC trades in corporate debt securities. 

c. On the date of reversal of repo trades, the clearing houses shall compute the obligations of the parties and facilitate settlement on DvP basis.

9. Prohibition on sale of repoed security 

The security acquired under repo shall not be sold by the repo buyer (lender of the funds) during the period of repo.   

10. Haircut 

a. A haircut of 25% (or higher as maybe decided by the participants depending on the term of the repo) shall be applicable on the market value of the corporate debt security prevailing on the date of trade of 1st leg. 

b. Participants may refer to the rating-haircut matrix that may be published by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), to determine the appropriate haircut.

11. Valuation

For arriving at the market value of the corporate debt security, the participants undertaking repo in corporate bonds may refer to the credit spreads published by the FIMMDA.

12. Capital Adequacy

The repo transactions in corporate debt securities shall attract capital charge.

13. Disclosure

The details of corporate debt securities lent or acquired under repo or reverse repo transactions is required to be disclosed in the “Notes on Accounts” to the Balance Sheet.

14. Accounting

The repo transactions in corporate debt securities shall be accounted as per the revised guidelines on uniform accounting for repo/reverse repo transactions in Government securities, which is expected to be issued separately.

15. Computation of CRR/SLR & borrowing limit 

a. The amount borrowed by a bank through repo shall be reckoned as part of its Demand and Time Liabilities (DTL) and the same shall attract CRR/SLR .

b. The borrowings of a bank through repo in corporate bonds shall be reckoned as its liabilities for reserve requirement and, to the extent these liabilities are to the banking system, they shall be netted as per clause (d) of the explanation under section 42(1) of the RBI Act, 1934. Such borrowings shall, however, be subject to the prudential limits for inter-bank liabilities.

16. Documentation 

The participants shall enter into bilateral Master Repo Agreement as per the documentation finalized by the FIMMDA.

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(This update will be useful for the candidates who are appearing for Treasury management subject).