RBI revamps norms to align the issuance of CPs and short term NCDs

Brief Overview:

The Reserve Bank of India (“RBI”) issued directions dated 03rd January 2024 for the purpose of issue of commercial papers (“CPs”) and short term non-convertible debentures (“STNCDs”). The revised norms aligns the provisions for the issue of both these instruments. These norms shall come into effect on 01st April 2024.

Technical Details:

Key highlights of the propositions made by RBI are as follows:

1) Face Value
The CPs and the STNCDs shall have a minimum face value of INR 5 Lakhs and will be issued in the multiple of INR 5 Lakhs vis-à-vis the present requirement of issuance in multiples of INR 1 Lakh.

2) Dematerialisation
The revised norms requires the CP and STNCDs to be issued in dematerialised form only.

3) Eligibility for issuance
(a) Present requirement:
Companies need to have (i) a net worth of INR 4 crores; (b) have a working capital limit or term loan sanctioned by banks or AIFIs; and (c) the borrowal account of such company has to be classified as a standard asset, to be eligible to issue CPs and STNCDs.

(b) Revised requirement:
Any company / Non-banking Financial Company / Housing Finance Companies / Infrastructure Investment Trust / Real Estate Investment Trust / Alternative Investment Funds can issue STNCDs and CPs. Any other body corporate shall require a net worth of INR 100 crores for the purpose of being eligible to issue CPs and STNCDs.

4) Eligibility for investing
The new regime prohibits investment in CPs and STNCDs issued by related parties.

5) Exercise of option:

Presently, the STNCDs can have a call / put option exercisable after the lapse of 90 days and CPs shall not carry any options. However, as per the new regime, CPs and STNCDs shall not carry any options.
6) Buyback
(a) Present requirement:
Current norms are silent on buyback of STNCDs.
(b) Revised requirement:
The buyback of CPs and STNCDs, both, can be undertaken after the lapse of 7 days and 90 days respectively, from the date of its issuance.
Besides, the buyback option must be given to all the holders of the instrument and not any specific holder and the said instruments shall stand extinguished on the date of its buyback and need not be alive until its date of maturity.

7) No Underwriting
While presently the prohibition of underwriting exists only for CPs, as per the new norms, neither the CPs not the STNCDs can be underwritten or co-accepted.

8) Settlement
(a) Present requirement:
The norms prescribe that all Over The Counter (OTC) trades (whether primary or secondary) must be done on a T+0 / T+1 basis.
(b) Revised requirement:
The settlement of the primary trades must be done on a ‘no later than T+4 working days’ basis, unless such other shorter timeline is prescribed under any other law. Further, the secondary market OTC trades shall be settled on a T+0 / T+1 basis.

9) Credit Rating
Presently, the issuer must have a minimum rating of ‘A2’ for the purpose of issuing STNCDs. However, this has been reduced to ‘A3’ in the revised norms.
The credit rating requirements for the issuance of CPs remains the same and shall continue to be a minimum of ‘A3’.

10) Appointment of an IPA
Akin to the issuance of CPs, the issuer of STNCDs is required to appoint an issuing and paying agent (IPA) through which the issuance and settlement of the STNCDs shall be routed. Additionally, the payment of coupon and repayment shall also be made through the IPA.

11)  Reporting of trades
Akin to the issuance of CPs, the reporting of the STNCD trades shall be done on the F-TRAC platform.
Additionally, the revised norms requires the reporting of the defaults
as well as the buybacks of the CPs and the STNCDs to be done on the F-TRAC platform. It also requires the debenture trustee and the depositories to provide regular reporting in relation to the issue.

12) Issuing STNCDs with floating rate interest
While the present norms are silent on permitting the issuance of STNCDs with a floating interest rate mechanism, the new norms specifically permit the same. Accordingly, the STNCDs can be issued at a discount or at par with fixed / floating coupon (linked to a benchmark published by Financial Benchmark Administrator (FBA) or approved by Fixed Income Money Market and Derivatives Association of India (FIMMDA)).
13) End-use
While the present norms are silent on the end-use requirements of the funds so raised by the issue of CPs and STNCDs, the new norms require that the said funds shall ordinarily be used to finance current assets and operating expenses and that the same must be disclosed in the offer document.

For further details, please see:

Revision of the RBI Master Directions for Commercial Paper and Non-Convertible Debentures of original or initial maturity upto one year.

For any queries / clarifications, please feel free to ping us and we will be happy to chat

● Ms. Apurva Kanvinde (apurva.kanvinde@jclex.com)
● Mr. Smit Parekh (smit.parekh@jclex.com )
● Mr. Aditya Tanwar (aditya.tanwar@jclex.com)

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