RBI issues draft norms on non-convertible debentures

The Reserve Bank on Tuesday came out with draft guidelines to regulate the issuance of non-convertible debentures with a maturity of less than a year by companies.

A debt instrument through which companies raise capital, non-convertible debentures with a maturity of less than a year till now are not regulated by either SEBI or the RBI.

The draft says these NCDs can be issued only by those who have net worth of at least Rs 4 crore as per their latest audited balance sheets.

Also, the instrument should not be issued for maturities of less than 90 days from the date of issue.

In fact, the excercise date of option (put or call) should not fall within 90 days from the date of issue, the draft guidelines says.

"The move is very welcome. The regulation of NCDs is very important as the instrument with a put or call option of less than a year is being used by a lot of corporates now," said Jagannatham Thunguntla, Equity Head, SMC Capitals.

He said that regulation of these instruments is needed to safeguard the interests of small investors who put in money in these bonds.

The draft says the eligible companies who intend to issue the NCDs will have to obtain credit rating from one of the rating agencies.

The issuer of the debt instrument should disclose to prospective investors its financial position as per the standard market practice and follow the provisions of the Companise Act and the SEBI Act, the draft says.

Further, the NCDs may be issued in denomination of Rs 5 lakh or multiples, and the amount invested by a single investor should not be less than Rs 5 lakh.

The aggregate amount of such debts issued by any issuer should be within the limit of the approved limit by the Board of Directors of the company or the amount indicated by the credit rating agency.

However, investments in the NCDs would only be done by individuals, banking companies, primary dealers, other corporate bodies registered or incorporated in India, NRIs and FIIs.