ISSUANCE OF NON CONVERTIBLE DEBENTURES (RESERVE BANK) DIRECTIONS, 2010

[Mr. M. GOVINDARAJAN]

INTRODUCTION:

To regulate the financial system of the country to it advantage the Reserve Bank of India by virtue of powers given to it under Sections 45K, 45L and 45W of the Reserve Bank of India Act, 1934 and of all the powers enabling it in this behalf, gives directions to the agencies dealing in securities and money market intermediaries for the issuance of non convertible debentures ('NCD' for short) of original or initial maturity period up to one year.

The directions may be called as 'Issuance of Non Convertible Debentures (Reserve Bank) Directions, 2010. This came into effect from 02.08.2010.

NCD:

The  expression 'Non convertible debenture' is defined as 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. NCDs shall not be issued for maturities of less than 90 days 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. The tenor of NCDs shall not exceed the validity period of the credit rating of the instrument. NCDs may be issued in denominations with a minimum of Rs.5 lakh (face value) and in multiples of Rs. 1 lakh. While option is available to both issuers and subscribers to issue/hold NCDs in dematerialized or physical form, they are encouraged to issue/hold NCDs in dematerialized form. However, banks, FIs and PDs are required to make fresh investments in NCDs only in dematerialized form.

LIMITS AND THE AMOUNT OF ISSUE:

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 two weeks from the date on which the corporate opens the issue for subscription.

ELIGIBILITY:

A corporate shall be eligible to issue NCDs if it fulfils the following criteria-

• It has a tangible net worth of not less than Rs. 4 crore, as per the latest audited balance sheet;
• It has been sanctioned working capital limit or term loan by bank(s) or all Indian Financial Institutions(s); and
• It's borrowal account is classified as a Standard Asset by the financing bank(s) or institutions.

CREDIT RATING:

An eligible corporate intending to issue NCDs shall obtain credit rating for issuance of the NCDs from one of the credit rating agencies,(CRA) viz.,-

• The Credit Rating Information Services of India Limited - (CRISIL); or
• Investment Information and Credit Rating Agency of India Limited - ICRA; or
• Credit Analysis and Research Limited - CARE; or
• FITCH Ratings India (P) Ltd.,; or
• Such other agencies registered with SEBI; or
• Such other credit rating agencies as may be specified by the RBI from time to time for this purpose.

The minimum credit rating shall be P-2 of CRISIL, or such equivalent rating by other agencies. The corporate shall ensure that at the time of issuance the rating so obtained is current and has not fallen due for review.

Code of Conduct prescribed by SEBI for the CRAs for undertaking rating of capital market instruments shall be applicable to them 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. Therefore CRA shall at the time of rating clearly indicate the date when the rate is due for review. The CRAs may decide the validity period of credit rating, they shall closely monitor the rating assigned to corporate vis-à-vis their track record at regular intervals and make their revision in the ratings public through their publications and web site.

PROCEDURE:

• 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 set forth in these directions for the issue of NCDs are met by the corporate;
• The requirements of all the provisions of the Companies Act, 1956 and 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;
• Issuers of NCDs of maturity up to one year shall follow the Disclosure document brought out by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), in consultation with RBI as amended from time to time.
• Every corporate issuing NCDs shall appoint a 'Debenture Trustee', registered with SEBI under the SEBI (Debenture Trustees) Regulations, 1993, for each issuance of the NCDs;
• Violation of the directions will attract penalties, which would include debarring of the entity from the NCD market.

ROLES AND RESPONSIBILITIES:

The roles and responsibilities of corporates and debenture trustees  are set out below:

*  The Corporate shall ensure that the guidelines and procedures laid down for issuance of NCD are strictly adhered to;

*  The debenture trustees shall be guided by these regulations, SEBI (Debenture Trustee) Regulations, 1993, the trust deed and offer document;

*  The Debenture Trustee 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;

*  The debenture trustee should submit to RBI on a quarterly basis a report on the outstanding amount ofNCDs of maturity up to year'

*  In order to monitor defaults in redemption ofNCDs, the debenture trustees are advised to report immediately, on occurrence, full particulars of defaults in repayment ofNCDs to the Financial Markets Department, RBI, Central Office, Fort, Mumbai;