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Commercial Paper and Non-Convertible Debentures of maturity up to one year

Reserve Bank of India (RBI) has issued directions on commercial paper and non-convertible debentures of maturity up to one year, which shall come into effect from April 01, 2024.

Commercial Paper (CP) and Non-Convertible Debenture (NCD) 

Commercial Paper (CP) means an unsecured money market instrument issued in the form of a promissory note.

Non-Convertible Debenture (NCD) means a secured money market instrument with an original or initial maturity up to one year.

Issuers of CPs and NCDs

CPs and NCDs may be issued by the following entities subject to the condition that all fund-based facilities availed by the issuer from banks / All India Financial Institutions (AIFIs) / Non-Banking Financial Companies (NBFCs) are classified as Standard at the time of issue –

  • Companies
  • NBFCs, including Housing Finance Companies (HFCs)
  • Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs)
  • AIFIs – Export Import Bank of India (EXIM), National Bank for Agriculture and Rural Development (NABARD), National Housing Bank (NHB), Small Industries Development Bank of India (SIDBI) and National Bank for Financing Infrastructure and Development (NaBFID).
  • Any other body corporate with a minimum net-worth of ₹100 crore
  • Co-operative societies and limited liability partnerships with a minimum net-worth of ₹100 crore

Investors of CPs and NCDs

  • All residents are eligible to invest in CPs and NCDs.
  • Non-residents are eligible to invest in CPs and NCDs to the extent permitted under Foreign Exchange Management Act (FEMA), 1999.
  • Resident and non-resident are not permitted to invest in CPs and NCDs issued by related parties.

Denomination and Tenor of CPs and NCDs

  • CPs and NCDs shall be issued in minimum denomination of ₹5 lakh and in multiples of ₹5 lakh thereafter.
  • The tenor of a CP shall be minimum 7 days and maximum 1 year. 
  • The tenor of an NCD shall be minimum 90 days and maximum 1 year.

Issuance of CPs and NCDs

  • CPs and NCDs shall be issued in dematerialised form.
  • Issuance of a CP / NCD with options (call / put) is not permitted.
  • Issuance of a CP / NCD is not permitted to be underwritten or co-accepted.
  • Total subscription by all individuals, including Hindu Undivided Families, in any primary issuance of CPs / NCDs shall not exceed 25% of the total amount issued.
  • An Issuing and Paying Agent (IPA) shall be appointed for each issuance of a CP and an NCD. A Debenture Trustee shall also be appointed for each issuance of an NCD.

Discount / coupon rate of CPs and NCDs

  • CPs shall be issued at a discount to the face value.
  • NCDs shall be issued at a discount to the face value or with fixed or floating rate coupon.
  • The coupon on floating rate NCDs shall be linked to a benchmark published by a Financial Benchmark Administrator or approved by Fixed Income Money Market and Derivatives Association of India (FIMMDA). The coupon on floating rate NCDs can also be linked to policy rates published by RBI.

Credit Enhancement facility 

  • Banks and AIFIs may choose to provide stand-by assistance / credit, back-stop facility, etc., by way of credit enhancement for a CP / NCD issue.
  • Non-bank entities (including corporates) may provide unconditional and irrevocable guarantee for credit enhancement of CPs and NCDs issued by a group entity.
  • Group entities means 2 or more entities related to each other through any of the following relationships – (a) subsidiary – parent; (b) joint venture; (c) associate; (d) Promoter-promotee; (e) common brand name or (f) investment in equity shares of 20% and above.

Rating Requirement for issue of CPs and NCDs

The minimum credit rating, assigned by a Credit Rating Agency (CRA), for the issuance of CPs and NCDs shall be ‘A3’ as per rating symbol and definition prescribed by Securities and Exchange Board of India (SEBI).

Trading of CPs and NCDs

CPs and NCDs shall be traded in Over-the-Counter (OTC) markets, including on Electronic Trading Platform (ETP), or on recognised stock exchanges.

End-use of CPs and NCDs

  • Funds raised through CPs and NCDs shall ordinarily be used to finance current assets and operating expenses. Where funds are used for other purposes, the exact / specific end-use shall be disclosed in the offer document.
  • The issuer shall submit a certificate from the Chief Executive Officer / Chief Financial Officer (CEO / CFO) to the IPAs concerned that the proceeds of CPs and NCDs have been used for the disclosed purposes and that all provisions of RBI directions and conditions of the offer document have been adhered to. The certificate shall be provided to the IPA within 3 months of the issue of CP / NCD or on maturity of the issue, whichever is earlier.

Buyback CPs and NCDs

Issuers are permitted to buyback the CPs and NCDs before maturity subject to the following conditions –

  • The buyback of CPs can be made only after 7 days from the date of issue. 
  • The buyback of NCDs can be made only after 90 days from the date of issue.
  • 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.
  • Buyback of CPs and NCDs shall be at the prevailing market price.

Default in repayment of CPs and NCDs

In the event of default of a CP / NCD, the issuer shall not be allowed to issue CPs / NCDs till full repayment of the defaulted obligation or 6 months after the date of default, whichever is earlier.


References

Reserve Bank of India. (2024, January 03). 'Master Direction – Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of original or initial maturity upto one year) Directions, 2024'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12592&Mode=0


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