31 January 2024
by Prashanth Ramdas , Diksha Singh and Viti Bansal
Khaitan & Co LLP
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Money market instruments play a pivotal role in fulfillingworking capital requirements of corporates by facilitatingacquisition of short-term financing and thereby establishingliquidity across diverse financial markets. The Reserve Bank ofIndia (RBI), as the regulator of the financial market, lays downthe regulatory landscape for the growth of these markets. In itsmost recent stride, with an aim to streamline the regulatoryframework on money markets instruments, RBI released the MasterDirection – Reserve Bank of India (Commercial Paper andNon-Convertible Debentures of original or initial maturity up toone year) Directions, 2024 (Master Directions) on 3 January2024.
A 'money market instrument' is defined by the RBI toinclude call or notice money, term money, repo, reverse repo,certificate of deposit, commercial usance bill, commercial paper,and such other debt instrument of original or initial maturity upto one year as the RBI may specify from time to time. The recentlyintroduced Master Directions govern the issuance of thosecommercial papers, and non-convertible debentures that qualify asmoney market instruments.
The Master Directions willsupersede:
the Master Direction on Money Market Instruments: Call/NoticeMoney Market, Commercial Paper, Certificates of Deposit andNon-Convertible Debentures (original maturity up to one year), 2016(Money Market Directions); and
the Reserve Bank Commercial Paper Directions, 2017 (CPDirections).
They will take effect from 1 April 2024 and bring about greatertransparency and consistency across products in the moneymarket.
The key regulatory changes with respect to the existing legalregime have been highlighted in detail below:
Definitions: Under the Master Directions, anon-convertible debenture has been defined to mean only securedmoney market instrument with an original or initial maturity up toone year (NCD). Under the old regime, the definition included adebt instrument issued by a corporate with original or initialmaturity up to one year and issued by way of private placement. Onthe other hand, the definition of commercial papers remains thesame, except that there is no minimum maturity for the sameprescribed now.
Eligibility to issue NCDs and commercial papers: Underthe Master Directions, NCDs and commercial papers can still only beissued by such entities who have not defaulted on any of theirfund-based facilities availed from banks, NBFCs, and all Indiafinancial institutions (AIFIs). In addition to companies, they canalso be issued by AIFIs, InvITs, REITs, and any other bodycorporate statutorily permitted to incur debt or issue debtinstruments in India with minimum net-worth of INR 100 crores. Thisminimum net worth requirement was INR 4 crores earlier.
Eligible investors for investment into NCDs and commercialpapers: The Master Directions have simplified the conditionsaround eligibility of investors by permitting all residents, andnon-residents permitted to invest in NCDs and commercial papersunder Foreign Exchange Management Act, 1999, to invest in suchinstruments. However, no person is permitted to invest in suchinstruments issued by a related party.
Provisions around issuance: Physical issuance of NCDs andcommercial papers is no longer permitted. Additionally, instrumentscannot be issued with an attached call or put option. The issuanceof such instruments continues to have credit rating requirements.Further, an updated set of disclosures is required to be made atthe time of issuance and reporting requirements have also beenprescribed. The RBI has also prescribed a timeline of 4 days forcompletion of funding and issuance of such instruments. Thistimeline is to be counted from the deal date, i.e., the date onwhich the trade details, including price/rate are agreed by theissuer and the investor(s).
Appointment of Issuing and Paying Agent (IPA) / DebentureTrustee: An IPA is now required to be appointed for each issueof NCDs and commercial papers. Similarly, each NCD issuance isrequired to have a debenture trustee in line with the requirementof debenture trustee for issuance of secured NCDs.
Credit enhancement: Earlier, in case of non-bank entities(including corporates) providing guarantees for credit enhancementof NCDs and commercial papers issued by a group entity, theguarantor was required to have a credit rating at least one notchhigher than the issuer. This requirement has now been removed underthe Master Directions.
Subscription and trading: The total subscription by allindividuals in any primary issuance of NCDs and commercial papersis now restricted to 25% of the total amount issued. The MasterDirections now permit the trading of such instruments on recognisedstock exchanges (as approved by RBI) in addition to trading onOver-the-Counter markets.
Defaults in repayment: NCDs have now been brought to parwith commercial papers in the terms of the consequence of repaymentdefaults. Issuers are restricted from accessing the market of therelevant instrument for 6 months from the date of such default.Further, the Master Directions now require all default details tobe publicly disseminated on F-TRAC platform and on the website ofthe issuer.
The Master Directions appear to be welcome changeintroducing greater transparency and curbing associated risks withenhanced disclosure requirements to ensure the streamlined growthof the money markets. The directions also aim to streamline themoney market regulations by harmonizing regulatory requirements forissuance of NCDs and commercial papers. As these directions takeroot, their successful execution will be pivotal in fosteringgrowth of money markets and boosting investor confidence in theyears to come.
The content of this document do not necessarily reflect theviews/position of Khaitan & Co but remain solely those of theauthor(s). For any further queries or follow up please contactKhaitan & Co at email@example.com
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Money Market Instruments
Money market instruments are financial instruments that facilitate short-term financing and help establish liquidity in diverse financial markets. These instruments play a pivotal role in fulfilling the working capital requirements of corporates. The Reserve Bank of India (RBI) is the regulator of the financial market in India and sets the regulatory landscape for the growth of money market instruments [].
Master Direction - Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of original or initial maturity up to one year) Directions, 2024
The RBI recently released the Master Direction - Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of original or initial maturity up to one year) Directions, 2024. These directions aim to streamline the regulatory framework for money market instruments. They govern the issuance of commercial papers and non-convertible debentures that qualify as money market instruments [].
Money Market Instruments Definition
The RBI defines a 'money market instrument' to include various instruments such as call or notice money, term money, repo, reverse repo, certificate of deposit, commercial usance bill, commercial paper, and other debt instruments with an original or initial maturity of up to one year. The RBI may specify additional instruments from time to time [].
Changes Introduced by the Master Directions
The Master Directions introduce several regulatory changes to the existing legal regime. Here are some key highlights:
Definition of Non-Convertible Debenture (NCD): Under the Master Directions, an NCD is defined as a secured money market instrument with an original or initial maturity of up to one year. The previous definition included debt instruments issued by corporates through private placement. The definition of commercial papers remains the same, except that there is no minimum maturity requirement [].
Eligibility to Issue NCDs and Commercial Papers: NCDs and commercial papers can be issued by entities that have not defaulted on any of their fund-based facilities availed from banks, non-banking financial companies (NBFCs), and all India financial institutions (AIFIs). In addition to companies, NCDs and commercial papers can also be issued by AIFIs, InvITs, REITs, and other body corporates with a minimum net worth of INR 100 crores (reduced from INR 4 crores) [].
Eligible Investors: The Master Directions simplify the conditions around the eligibility of investors. All residents and non-residents permitted to invest in NCDs and commercial papers under the Foreign Exchange Management Act, 1999, can invest in such instruments. However, investing in instruments issued by a related party is not permitted [].
Issuance Provisions: Physical issuance of NCDs and commercial papers is no longer permitted. Instruments cannot be issued with an attached call or put option. Credit rating requirements for issuance continue to exist, and updated disclosures are required at the time of issuance. The RBI has also prescribed a timeline of 4 days for completion of funding and issuance [].
Appointment of Issuing and Paying Agent (IPA) / Debenture Trustee: An IPA is now required to be appointed for each NCD and commercial paper issue. Similarly, each NCD issuance must have a debenture trustee in line with the requirement for secured NCD issuances [].
Credit Enhancement: The requirement for a guarantor providing credit enhancement to have a credit rating at least one notch higher than the issuer has been removed under the Master Directions [].
Subscription and Trading: The total subscription by all individuals in any primary issuance of NCDs and commercial papers is now restricted to 25% of the total amount issued. Trading of such instruments is permitted on recognized stock exchanges approved by the RBI, in addition to Over-the-Counter markets [].
Defaults in Repayment: NCDs and commercial papers are treated similarly in terms of the consequences of repayment defaults. Issuers are restricted from accessing the market of the relevant instrument for 6 months from the date of default. Default details must be publicly disseminated on the F-TRAC platform and the issuer's website [].
These changes aim to bring about greater transparency, consistency, and streamlined growth in the money markets, fostering investor confidence in the years to come [].
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