RBI proposes 90-day lock-in for non-convertible debentures

RBI proposes 90-day lock-in for non-convertible debentures
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First Published: Tue, Nov 03 2009. 09 50 PM IST
Updated: Tue, Nov 03 2009. 09 50 PM IST
Mumbai: The Reserve Bank of India, or RBI, on Tuesday raised objections to the buy and sell options of non-convertible debentures (NCDs) within a short period of issuance and said that such option should not be exercised before 90 days of issuance.
Currently, NCDs with maturity of less than a year are not regulated by either the capital markets regulator Securities and Exchange Board of India, or Sebi, or by RBI.
“Often, these instruments are issued with call/put options embedded in it, which impart a demand-liability like character to these instruments,” RBI said, adding that these instruments need to be regulated “as they have systemic implications and such instruments, being money market instruments...should be regulated by the Reserve Bank.”
NCDs are a popular form of money market instrument for companies that typically issue these papers with a call/put option of 10-15 days. Although the bond may have a maturity of three to five years, the bond is terminated as soon as the call or put option is exercised by the borrower and the investor. Thus, even if the bond is of a higher maturity, it ceases to exist after a call/put option is exercised.
In its draft guidelines for issuance of NCDs that mature in less than a year, RBI has said that those with maturity periods of less than 90 days should not be issued. Such papers shall be valid only till the date that the credit rating of the issuing company is valid.
The NCDs have to be issued in denominations of Rs5 lakh or multiples and the amount invested by a single investor should not be less than Rs5 lakh RBI said. It added that the total amount of the NCDs issued should be raised within two weeks of issuance.
A company with a net worth of Rs4 crore or more can issue short-term NCDs, which have to be rated by at least one credit rating agency.
Under the new regulation, NCDs that have maturity of more than a year but carry a call/put option of being exercised within a year of issue will no longer be allowed to be terminated before 90 days.
Comments on this draft, prepared by an internal working group of Sebi and RBI can be submitted by 20 November, the central bank said.
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First Published: Tue, Nov 03 2009. 09 50 PM IST