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Another money market instrument – short term NCDs


Vinod Kothari & Payel Jain



In order to regulate and control money market instruments – that is, short term debentures of 3-12 months maturity, the RBI, in pursuance of sec. 45W – which pertains to money market instruments, has issued new directions - Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010 to regulate issue of Non-Convertible Debentures (NCDs) by Corporate. The market in India was flush with such instruments in the past – particularly with mutual funds buying these instruments. Now with coming into effect of these Directions, a company can issue Non-Convertible Debentures, whether secured or not, by complying with these Directions in addition to complying with the requirements of the Companies Act, 1956 (section 58A read with deposit rules), SEBI ((Issue and Listing of Debt Securities) Regulations), 2008 and other applicable laws.

One question that remains is how do short term NCDs differ from commercial paper? The legal form of CP is in form of pro-notes, and the bonds are in form of bonds, but CP also goes upto 1 year maturity and so does an NCD. So is it only the difference of name? CP is meant for funding working capital and the amount of CP issued is deducted from the working capital facility of the corporate. There is no such bar on short term NCDs – which means NCDs are more flexible.

It is apparent from a reading of the Directions and the draft guidelines issued by the RBI that this is only an attempt to enable short term NCDs. It is not that such instruments did not exist prior to the Directions - infact, several corporates flagrantly went and issued such short term NCDs without any regulatory system. So to bring such instruments within the regulatory control and protect the interest of investors, RBI has framed these Directions and made it applicable to all companies including NBFCs.

Few questions arising out of these Directions need to be attended immediately by the RBI to make it an effective tool of control:

Secured or unsecured:

The draft guidelines placed on the website of RBI contained the following definition of NCDs

“Non-Convertible Debentures (NCDs) will mean secured, negotiable money market instruments with original maturity of less than one year issued by corporates (including NBFCs) to meet their short term funding requirements, issued by way of private placement with investors. The guidelines also cover NCDs with original maturity of more than one year with optionality attached to it which can be exercised within a year from the date of issue”

However, in the Directions, NCDs have been defined to mean a debt instrument issued by a corporate (including NBFCs) with original or initial maturity up to one year and issued by way of private placement. Does that mean NCDs would include both secured and unsecured NCDs? Yes – it is clear.

short term instruments only:

The Directions have been made uniformly applicable to issue of NCDs having original or initial maturity period of one year. As per the current regulatory regime, the Public Deposit rules are also applicable on the same. The idea of the regulation must have been that Public Deposit rules will be applicable when the tenure exceeds 1 year. Though no such exemption is granted, but it is only logical to expect that Companies (Public Deposit rules) and NBFC directions will be amended in light of this.

Partially convertible debentures:

What if the debentures are partially convertible, in such case, will the Directions have to be complied with for the Non-convertible part or that the same would remain outside the purview of these Directions

Pre-condition of subsisting loan:

The Directions has placed a strange condition in the eligibility conditions that the issue intending to issue NCDs must have subsisting working capital loan or term loan sanctioned by Bank or All- India financial institution and the same has been classified as Standard Asset by the respective financing entity, that is, an issuer has to first explore bank funds before resorting to NCDs as a means of financing short term funding requirements. Further, if a company is denied bank fund, it would anyhow become difficult for the company to obtain required rating so as to become eligible to issue NCDs. Hence, the requirement of eligibility is somewhat confusing.

Salient features of the Directions are summarized as under:

Effective date

August 2, 2010

Eligible issuers

·        Company defined under the Companies Act, 1956

·        NBFCs

·        A corporation established by an act of any Legislature

Eligible lenders

·        Individuals,

·        Banks and Primary Dealers (subject to the approval of the respective regulators)

·        Other corporate bodies including insurance companies and mutual funds registered or incorporated in India and

·        Unincorporated bodies,

·        Non-Resident Indians (NRIs) and

·        Foreign Institutional Investors (within such limits as may be set forth in this regard from time to time by the SEBI)

Eligibility criteria

·        Tangible net worth of issuer not less than Rs.4 crore, as per the latest audited balance sheet

·        The corporate has been sanctioned working capital limit or term loan by bank/s or all-India financial institution/s; and

·        The borrowal account of the corporate is classified as a Standard Asset by the financing bank/s or institution/s.

Credit rating

·        Issuer shall obtain credit rating for issuance of the NCDs from SEBI registered rating agency or specified by RBI

·        Minimum rating: P-2 of CRISIL or equivalent


·        NCDs shall not be issued for maturities of less than 90 days from the date of issue.

·        Exercise date of option attached to NCD shall not fall within 90 days of issue

·        Maximum tenor of NCDs not to exceed the validity period of credit rating of the instrument


·        NCDs may be issued in denomination with minimum of Rs.5 lakh (face value) and in multiples of Rs.1 lakh.

Maximum amount that can be issued

Lower of two:

·        As approved by BOD

·        As indicated by CRA (The CRA shall have the discretion to determine the validity period of the rating depending upon its perception about the strength of the issuer and at the time of rating, clearly indicate the date when the rating is due for review)

Compliance required

·        Provisions of the Companies Act, 1956

·        The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008

·        any other applicable law

Appointment of debenture trustee

·        Issuer has to appoint a SEBI registered Debenture Trustee for each issue

Other features

·        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

·        Dematerialisation of NCDs issued to banks and, FIs and PDs mandatory

·        Debenture Trustee to report,

o       within three days from the date of completion of the issue, the issuance details to the Chief General Manager, Financial Markets Department, Reserve Bank of India, Central Office, Fort, Mumbai-400001.

o       submit to the Reserve Bank of India (on a quarterly basis) a report on the outstanding amount of NCDs of maturity up to year

o       report immediately, on occurrence, full particulars of defaults in repayment of NCDs to the Financial Markets Department


Penalties include debarring of the entity from the NCD market.


Published by

Payel Jain
Category Corporate Law   Report

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