December 01 2009
On November 3 2009 the Reserve Bank of India placed the draft guidelines on the issuance of non-convertible debentures of maturity of less than one year open for comment. At present, neither the Securities and Exchange Board of India (SEBI) nor the government regulates the issuance of non-convertible debentures with original maturity of less than one year. Previously, the High-Level Coordination Committee on Financial Markets had taken the view that these instruments need to be regulated because they have systemic implications, and that such instruments, as money market instruments in terms of the provisions of the Reserve Bank of India Act 1934, should be regulated by the Reserve Bank. Therefore, an internal working group with representation from SEBI and the Reserve Bank was established in order to assess the legal issues surrounding regulating the issuance of non-convertible debentures with maturity of less than one year. These issues were discussed by the Technical Advisory Committee on Money, Foreign Exchange and Government Securities Market at its meeting on September 23 2009.
Pursuant to the existing guidelines, 'non-convertible debentures' are defined as secured, negotiable money market instruments with original maturity of less than one year that are issued by companies (including non-banking financial companies) to meet their short-term funding requirements by way of private placement with investors. Further, the guidelines also embrace non-convertible debentures with original maturity of more than one year with exercisable options within one year of their issue.
Only companies fulfilling the criteria included in the guidelines are eligible to issue non-convertible debentures of maturity of less than one year. The eligibility criteria are as follows:
Another aspect of the existing guidelines pertains to credit ratings. The guidelines provide that an eligible company intending to issue non-convertible debentures will be required to obtain a credit rating for the issuance of the non-convertible debentures from:
The minimum credit rating required will be P-2 from the Credit Rating Information Services of India Ltd or such equivalent rating from another agency. Issuers will be responsible for ensuring that the rating obtained is current and has not fallen due for review at the time of issuing the non-convertible debentures.
Further, with respect to maturity requirements, non-convertible debentures issued will have a maturity period of no less than 90 days from the date of issue. The exercise date of option (put/call), if any, attached to the non-convertible debentures will not fall within 90 days of the date of issue and the maturity date of the non-convertible debenture will co-terminate with the date up to which the issuer's credit rating is valid. According to the guidelines, non-convertible debentures may be issued in denominations of Rs500,000 or multiples thereof. An amount invested by a single investor should be no less than Rs500,000 face value.
The aggregate amount of non-convertible debentures from an issuer will be required to be within the limit as approved by the company's board of directors or the quantum indicated by the credit rating agency for the specified rating, whichever is lower. The total amount of non-convertible debentures proposed to be issued should be raised within two weeks of the date on which the issuer opens the issue for subscription.
The guidelines also provide for the procedure to be followed when issuing non-convertible debentures. Pursuant to the stated procedure, the issuer must disclose to prospective investors its financial position according to standard market practice. Where applicable, issuers must follow all the provisions contained in the Companies Act 1956 and the SEBI (Issue and Listing of Debt Securities) Regulations 2008. Debentures will be allotted in the form of a letter of allotment followed by a debenture certificate within the timeframe prescribed by the Companies Act. Non-convertible debentures will be issued at face value and will carry a coupon rate as determined by the issuer.
Every issuer that intends to issue non-convertible debentures will be required to appoint a debenture trustee for each issuance of non-convertible debentures pursuant to the guidelines. Only commercial banks that are registered as debenture trustees with SEBI will be eligible to act as debenture trustees for the issue of non-convertible debentures. Non-convertible debentures may be issued to and held by:
Investment by foreign institutional investors must adhere to the limits for their investments set by SEBI.
As provided in the guidelines, while the option is available to both issuers and subscribers to issue or hold non-convertible debentures in dematerialized or physical form, issuers and subscribers should be encouraged to issue or hold non-convertible debentures in dematerialized form. However, banks, financial institutions and primary dealers must make fresh investments in non-convertible debentures in dematerialized form only.
Issuers must strictly adhere to the guidelines and procedures laid down for the issuance of non-convertible debentures. The roles, responsibilities, duties and functions of debenture trustees will be guided by these regulations, the SEBI (Debenture Trustees) Regulations 1993, the trust deed and the offer document. Credit rating agencies will be required to adhere to the code of conduct prescribed by SEBI for undertaking ratings of capital market instruments. The credit rating agency will have the discretion to determine the validity period of the rating depending on its perception of the issuer's strength. Accordingly, the credit rating agency will, at the time of rating, clearly indicate the date on which the rating is due for review. While credit rating agencies may decide the credit rating's validity period, they must closely monitor the rating assigned to issue in relation to their track record at regular intervals and make any revisions public through their publications and website.
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