Background

The Reserve Bank of India (“RBI”) has issued Master Directions-Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of Original or Initial Maturity Upto One Year) Directions 2024 (“the Directions”) (click here) on January 03, 2024, pursuant to powers granted under section 45J, 45K, 45L and section 45W of the Reserve Bank of India Act, 1934 (“the act”) read with section 45U of the Act.

Applicability

These directions are applicable to all persons/agencies dealing in Commercial Paper and/or Non-Convertible Debentures of original or initial maturity upto one year and will come into force with effect from April 01, 2024.

The key highlights of the Directions are stated below:-

1. What is a Commercial Paper?

A commercial paper (“CP”) refers to an unsecured money market instrument issued in the form of a promissory note.

2. What is a Non-Convertible Debenture?

A non-convertible debenture (“NCD”) refers to a secured money market instrument with an original or initial maturity upto one year.

3. Eligible Issuers

The following entities are eligible to issue CPs and NCDs 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: - a) Companies; b) NBFCs, including Housing Finance Companies; c) InvITs and REITs; d) All India Financial Institutions; d) 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; e) Any other entity specifically permitted by RBI; and f) Co-Operative Societies and Limited Liability Partnerships with a minimum net worth of INR 100 crore.

4. Eligible Investors

The following are eligible to invest in CPs and NCDs:- a) All residents; and b) Non-residents (extent permitted under Foreign Exchange Management Act, 1999 or the rules/regulations framed thereunder). Further, no person, resident or non-resident, can invest in CPs and NCDs issued by related parties either in the primary or through the secondary market.

5. Issuance

• CPs and NCDs shall be issued in (a) dematerialized form and be held with a depository registered with the Securities and Exchange Board of India; (b) minimum denomination of INR 5 lakh and in multiples of INR 5 lakh thereafter.
• An IPA shall be appointed for each issuance of a CP and an NCD and subscription to the primary issue shall be routed through an IPA. A Debenture Trustee shall also be appointed for each issuance of an NCD. 

6. Tenor

The tenor of a CP shall not be less than seven days or more than one year and of an NCD shall not be less than ninety days or more than one year.

7. Settlement

The settlement period for the issuance of CPs and NCDs, which includes the payment of funds to the issuer and the issuance of CPs and NCDs to investors, cannot exceed T+4 working days. The deal date, denoted by T, is the date on which the issuer and the investor(s) agree on the trade details, including price and rate.

8. Subscription

In any primary issuance of CPs or NCDs, the total subscription by all people, including Hindu Undivided Families, should not exceed twenty-five percent of the total amount issued.

9. Discount/ Coupon Rate

CPs shall be issued at a discount to the face value and the NCDs shall be issued at a discount to the face value or with fixed or floating rate coupon. 

10. End-use

Typically, the money raised through CPs and NCDs shall be used to pay for operational expenses and finance current assets; the offer document will specify this end purpose.

11. Secondary Market Issuance

• CPs and NCDs shall be traded either in Over-the-counter (“OTC”) markets, including on ETPs, or on recognised stock exchanges, approved by the Reserve Bank for the purpose.
• The settlement cycle for OTC trades in CPs and NCDs shall be either T+0 or T+1.
• Every OTC secondary market transaction in CP (including those conducted on Electronic Trading Platforms, or "ETPs") will be settled through the clearing corporation of any recognized stock exchange, or through any other RBI approved mechanism, on a Delivery versus Payment ("DvP") basis.
• Every OTC secondary market transaction involving NCDs (including those involving ETPs) must be settled bilaterally, or on a DvP basis through the clearing corporation of any recognised stock exchange, or any other mechanism approved by the RBI.

12. Buyback

The issuer of CPs and NCDs are permitted to buyback the CPs and NCDs before maturity subject to the following conditions:

a)  The buyback of CPs can be made only after seven days from the date of issue. The buyback of NCDs can be made only after ninety days from the date of issue; b) the buyback offer shall be extended to all investors in a particular issue on identical terms and conditions. The investors shall have the option to accept or reject the buyback offer; c) buyback of CPs and NCDs shall be at the prevailing market price; d) the issuer of a CP/NCD shall inform the details of the buyback to the IPA on the date of buyback. In the case of NCDs, the details shall also be informed to the Debenture Trustee; e) the payment for the buyback of the CP/NCD by the issuer shall be routed through the IPA; and f) CPs and NCDs bought back, partially or in full, shall be extinguished on the date of buyback.

13. Repayment

• There will be no grace period for repayment of CPs/NCDs.
• The issuer shall make the funds for redemption available to the IPA by 3:00 P.M. on the redemption date.
• The repayment shall be routed through the IPA.

14. Default

• Before 5:00 p.m. on the default date, the issuer that has fallen behind on the repayment of a coupon or redemption of a CP or NCD, in whole or in part, must notify the IPA of the specifics of the payment default. The Debenture Trustee must also be advised of the specifics in the event of NCDs.
• A CP/NCD will be extinguished on the date of conversion if it is changed into another financial instrument following default as a part of a bilateral, multilateral agreement or restructuring scheme.
• If a CP or NCD defaults, the issuer will not be permitted to issue any further CPs or NCDs until the defaulted obligation is fully repaid or six months has passed after the date of default, whichever is earlier.

15. Reporting Requirements

• Details of all issuances in primary markets of the CPs and NCDs shall be reported by the IPA on the F-TRAC platform by 5:30 PM on the day of issuance.
• All secondary market transactions in CPs and NCDs, executed in the OTC market and/or on the recognised stock exchanges, shall be reported with time stamp within 15 minutes of execution (the time when price is agreed) on the F-TRAC platform by each counterparty to the transaction.
• Details of buybacks of CPs and NCDs shall be reported by the IPA on the F-TRAC platform by 5:30 PM on the buyback date.
• By 5:30 PM on the day of default or, if applicable, the day of repayment of defaulted obligations, the IPA shall record instances of default and repayment of defaulted obligations on the F-TRAC platform.

16. Direction Violation

Apart from pursuing any legal or regulatory action, the RBI will make that individual’s participation in the CP and NCD markets ineligible for a maximum of one month at a time, following a reasonable opportunity for the entity to defend its actions, and such action would be made public by RBI.

Author`s View:

The directions provide a robust and sustainable mechanism to facilitate issuance and buyback of CPs and NCDs in the primary and secondary market. By strengthening the framework for short-term debt instruments, these guidelines tend to improve investor protection and transparency.

Please find a copy of the RBI’s Master Directions here.

This update has been contributed by Jitendra Soni (Partner) and Harsh Garg (Associate).

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