Issue of non-convertible debentures regulated

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe

The Reserve Bank of India (RBI) has recognized the importance of corporate deposits for meeting the capital requirements of companies in need of finance.

In a circular dated 23 June, the RBI has prescribed directions for the issue of non-convertible debentures (NCDs) that have original or initial maturity up to one year. NCDs are debt instruments issued by corporates, including non-banking finance companies (NBFCs), by way of private placement.

These directions, effective from 2 August, have been issued in order to regulate the existing financial system of the country.

Shardul Thacker,Partner,Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Mulla & Mulla & Craigie Blunt & Caroe

Criteria for issuing NCDs

A corporate can issue NCDs subject to the following conditions: 1) it has a tangible net worth of not less than Rs40 million (US$850,000) as per its latest audited balance sheet; 2) it has been sanctioned a working capital limit or term loan by a bank or all-India financial institution; and 3) its borrowal account is classified as a standard asset by a financing bank or institution.

An eligible corporate would be required to obtain a credit rating for the NCDs to be issued by it from a reputed rating agency, such as the Credit Rating Information Services of India (CRISIL), Investment Information and Credit Rating Agency of India (ICRA), Credit Analysis and Research (CARE), FITCH Ratings India or any other agency registered with the Securities and Exchange Board of India (SEBI) or specified by the RBI.

The minimum credit rating to be obtained by the corporate has been prescribed as P-2 by CRISIL or any equivalent rating of other agencies. An obligation has been placed on the corporate to ensure that the credit rating obtained is in force and is not due for review at the time the NCDs are being issued.

In addition: 1) The maturity of the NCDs should not be less than 90 days from the date of issue and the tenor of the NCD cannot not exceed the validity of the credit rating; 2) If any put or call option is attached to an NCD the same is not exercisable within the 90 day period; 3) NCDs may be issued in denominations with a minimum of Rs500,000 (face value) and in multiples of Rs100,000; 4) NCDs issued by a corporate should be within the ceiling approved by its board or as indicated by the credit rating agency, whichever is lower; 5) The issue of NCDs should be concluded within two weeks from the date on which the issue opens; 6) 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.


Corporates proposing to issue NCDs are required to make complete disclosures to prospective investors of their financial status and their auditors must certify compliance to all the eligibility criteria. Such corporates are required to comply with the Companies Act, 1956, the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, etc. and the NCD certificates must be issued within three months of allotment.

Further, such corporates are required to appoint eligible debenture trustees who should, on a timely basis, submit to the RBI necessary information such as quarterly reports on the outstanding amount of NCDs and defaults in repayment of NCDs. The debenture trustees are also required to file a report setting out the NCD issuance details with the RBI within three days of the issue being concluded.

With regard to credit rating of the NCDs, the credit rating agencies have been vested with power to ascertain the period of validity of the credit rating vis-à-vis the standing, track record and strength of the issuing corporate. Accordingly, the credit rating agency should, at the time of rating, categorically specify the date when the rating is due for reconsideration and make revisions in the ratings public through its website.

While undertaking the rating of NCDs, credit rating agencies are required to adhere to the code of conduct prescribed by SEBI in relation to rating capital market instruments.

Investment in NCDs

NCDs may be issued to individuals, banks, primary dealers, non-resident Indians, foreign institutional investors (FIIs), corporate bodies such as insurance companies, mutual funds registered or incorporated in India and unincorporated bodies. Investment in NCDs by FIIs will be subject to the caps prescribed by SEBI from time to time.

While NCDs may be issued and held either in dematerialized or physical form, fresh investments in NCDs by FIIs, banks, and primary dealers must be in dematerialized form.

Corporates issuing NCDs with a one year maturity are required to comply with the disclosure documents published by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) in consultation with the RBI. The RBI has also stipulated that entities committing a breach of these directions would be liable to penalties, including barring of the entity from the NCD market.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.


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