The Reserve Bank of India (RBI) recently introduced draft directions on the issue of commercial papers and non-convertible debentures (NCDs) with a maturity of less than one year. The regulatory framework for these instruments has seen a steady evolution, with the RBI first issuing directions in June 2010 to regulate NCDs with a maturity of less than one year as money market instruments. Such NCDs were previously unregulated by the RBI. Various directions on instruments akin to money markets instruments were consolidated in 2016 in a master direction, updated periodically since then.
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While the provisions of the draft directions are largely in line with existing directions, interesting changes have been proposed. The draft directions prescribe that NCDs can be issued by companies (including non-banking financial companies), and commercial papers can be issued by such companies as well as co-operative societies and unions, limited liability partnerships and other bodies corporate that are statutorily permitted to incur debt or issue debt instruments, subject to a minimum net worth of at least ₹1 billion (US$13.6 million). Fund-based facilities availed by such issuers from banks and financial institutions must be classified as standard. Commercial papers must have a maturity of at least seven days and a maximum maturity of one year, and NCDs must have a maturity of at least 90 days and a maximum maturity of one year. Further, commercial papers can only be issued at a discount to the face value. Such instruments can now only be issued in dematerialized form and must be rated, with a minimum rating of A3. The draft directions also prescribe mandatory disclosures and certain restrictions in relation to the minimum denomination of such instruments, underwriting, and end use.
Other than related parties of issuers, both residents and non-residents (to the extent permitted under Indian foreign exchange regulations) are eligible to invest in commercial papers and NCDs in the primary and the secondary market. The draft directions also prescribe thresholds for subscription of commercial papers and NCDs. For instance, investment by an entity, including investments by its related parties, cannot exceed 50% of the issuance in any primary issuance of a commercial paper or NCD. Thresholds are also prescribed for investment by individual investors. While the draft directions do not elaborate on the rationale, such thresholds will encourage a diversified investor base and reduce the concentration of holding of such commercial papers and NCDs with specific investors or group companies.
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Issuers are also required to appoint a scheduled commercial bank as an issuing and paying agent in respect of a commercial paper or NCDs, and all subscriptions, redemptions, buybacks and payments are to be routed through such an agent. A debenture trustee must be appointed for NCDs. Commercial papers and NCDs can be traded either in over-the-counter markets or on recognized stock exchanges with the RBI’s approval. All secondary market transactions in commercial papers and NCDs must be settled on a delivery versus payment basis through the clearing corporation of any recognized stock exchange, or any other RBI-approved mechanism.
Although the draft directions disallow call and put options, these permit the buyback of commercial papers after 30 days of issue, and NCDs after 120 days of issue. The buyback offer must be made to all investors on identical terms, and must be at prevailing market prices. Any commercial papers and NCDs bought back would be extinguished on the same day. Further, commercial papers and NCDs cannot have any grace period for repayment. The draft directions prescribe obligations on issuers with respect to notification of default and future issuances in case of any default in repayment.
The draft directions have been proposed with “the objective of bringing consistency across products in terms of issuers, investors and other participants” and to “rationalize existing regulations covering different money market products”. The introduction of the draft directions is a move in the right direction. While it could be argued that the changes proposed are not immediately required, it is unequivocally clear that these would create the groundwork for a diversified investor and issuer base for commercial papers and NCDs with a maturity of up to one year, and would also systemize directions and guidelines applicable to such instruments.
Sawant Singh and Aditya Bhargava are partners at Phoenix Legal. Sristi Yadav, an associate, also contributed to this article
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