RBI revamps Directions for issuance of Commercial Paper

By Richa Saraf, legal@vinodkothari.com

The Reserve Bank of India (RBI) vide Notification No. MRD.DIRD.01/CGM (TRS) – 2017 dated August 10, 2017 has issued Reserve Bank Commercial Paper Directions, 2017 (“New Directions”). The new guidelines are in supersession of the existing directions on Commercial Paper in the Master Directions on Money Market (Section II) RBI/FMRD/2016-17/32 dated July 7, 2016 (“Old Directions”). The following table captures the difference between the old and new directions:-

Particulars New Directions[1] Draft Directions[2] Old Directions[3] Our comments
Eligible issuers Companies- including NBFCs

are eligible to issue CPs subject to the condition that any fund-based facility availed of from bank(s) and/or financial institutions is classified as a standard asset by all financing banks/institutions at the time of issue.

Companies

  1. with sanctioned working capital limit and
  2. standard asset classification

by banks/ FIs

Companies

  1. with tangible net worth of not less than 4 crores;
  2. with working capital; and
  3. standard asset classification by banks
One of the major changes in the Directions is the removal of minimum net-worth requirement. Therefore, now even small and medium sized companies will be able to raise funds through CPs, provided the other requirements under the Directions are complied with.
All India Financial Institutions-

are eligible to issue CPs subject to the condition that any fund-based facility availed of from bank(s) and/or financial institutions is classified as a standard asset by all financing banks/institutions at the time of issue.

All India Financial Institutions

  1. with sanctioned working capital limit and
  2.  standard asset classification

by banks/ Fis

Financial Institutions – No eligibility conditions for issuance Same as above.
Primary dealers – No eligibility conditions for issuance Primary dealers – No eligibility conditions for issuance
Other entities- like co-operative societies/unions, government entities, trusts, limited liability partnerships and any other body corporate-

a.       having presence in India;

b.      with a net worth of Rs. 100 crore or higher; and

c.       subject to the condition that any fund-based facility availed of from bank(s) and/or financial institutions is classified as a standard asset by all financing banks/institutions at the time of issue.

Other entities

  1. with working capital and
  2.  standard asset classification by banks
  3. Minimum net-worth of Rs. 100 crores
No such category Earlier only companies were allowed to raise funds through CP, but now other form of entities can also raise funding through issuance of CPs. However, looking at the minimum net-worth requirement in this category, we feel only foreign entities can explore this route for fund raising.
  Such other entity as permitted by RBI Such other entity as permitted by RBI No such provisions
Tenor 7 days to 1 year 7 days to 1 year 7 days to 1 year
Eligible Investors
  1. All residents, and non-residents permitted to invest in CPs under Foreign Exchange Management Act, 1999 are eligible to invest in CPs;
  2. No person can invest in CPs issued by related parties either in the primary or secondary market.
  3. Regulated financial sector entities subject to regulatory restrictions as applicable to them.
  1. Residents
  2. Non-residents
  3. Regulated financial sector entities subject to regulatory restrictions as applicable to them

Related parties cannot invest

  1. Individuals
  2. Banks
  3. Other body corporates/ unincorporated entities
  4. Non-residents Indians
  5. Foreign institutional investors subject to regulatory restrictions as applicable to them
The regulators tread very cautious when it comes to related party transactions. The same has also found some caveats in the consultation paper where related parties are barred from investing in commercial paper issuances.
Form of issuance Demat Demat Physical or demat
Denomination 5 lakh and multiples thereof 5 lakh and multiples of 1 lakh 5 lakh and multiples thereof The provisions under the Old Directions have been retained in the New Directions, despite the proposal to change in the same in the Draft Directions.
Mode of issuance Silent on it. Silent on it. Private placement
Rating requirement Eligible issuers, whose total CP issuance during a calendar year is Rs. 1000 crore or more, shall obtain:

a.    credit rating for issuance of CPs from 2 (Two) rating agencies and lower rating to be quoted

b.   Where both ratings are the same, the issuance shall be for the lower of the two amounts for which ratings are obtained.

c.    Minimum rating is A3

 

a.    2 (Two) rating and lower rating to be quoted

b.    Minimum rating is A3

a.    2 (Two) rating and lower rating to be quoted

b.    Minimum rating is A3

The New Directions state that rating has to be obtained from at least two rating agencies and the lower of the two shall apply.

In case the rating issued by both the CRAs are same, then the issuer shall be able to issue CPs to the extent of the lower of the two amounts for which ratings have been obtained.

Let us take an example –

Company A obtains the following ratings –

·         Rating Agency A – A1 for Rs.1000 crores

·         Rating Agency B – A1 for Rs. 1500 crores

Here the Company will be able to issue CPs to the extent of Rs. 1000 crores only.

Now, what if the Company wants to raise another Rs. 500 crores? – It will have to seek a fresh rating from Rating Agency A for Rs. 1500 crores.

 

Obligations of Issuer a.    Appoint an Issuing and Paying Agent (IPA) for issuance of a CP.

b.    Comply with all relevant requirements under these directions and furnish a declaration in this regard to the IPA.

c.    Furnish the board resolution authorizing the company to borrow through issuance of a CP to the IPA.

d.   Keep the bank(s) from whom it has outstanding fund or non-fund based credit facility(ies) informed of its market borrowings, including through CPs, latest by the end of the month in which a CP was issued.

e.    Arrange for crediting the CP to the demat account of the investor with the depository through the IPA within 7 (Seven) days of issue.

f.     Route all subscriptions/ redemptions/ buybacks/ payments and default details through the IPA.

g.    Submit a certificate from the CEO/ CFO to the concerned IPAs on quarterly basis that CP proceeds are used for disclosed purposes, and certifying adherence to other conditions of the offer document and the CP directions. The certificate may be provided within 15 (Fifteen) days from the close of the quarter.

h.   Inform the CRA and IPA on the same day about any default/ delay in CP related payments.

i.      The issuer who has defaulted on a CP shall not be allowed to access the CP market for 6 (Six) months from the date of repayment of the defaulted obligation.

Ensure that the guidelines and procedures laid down for the issuance of CP are strictly adhered to. a.     Comply with all relevant requirements under these Directions.

b.     Appoint an IPA for issuance of CP.

c.     Furnish the Board Resolution authorizing the company to borrow through issuance of CP to the IPA.

d.    Keep the bank (s) from whom it has outstanding credit facility (ies) informed of its market borrowings, including through CPs, latest by the date of borrowing.

e.     Arrange for crediting the CP to the Demat account of the investor with the depository through the IPA.

f.      Route all subscriptions/redemptions/payments through the IPA.

g.     Submit a certificate from the CEO/CFO to the concerned IPAs on quarterly basis that CP proceeds are used for disclosed purposes, and certifying adherence to other conditions of the offer document.

 

This provides for additional compliance requirements on  the issuer.
CRA obligations No such approval criteria provided Take approval for rating No such approval criteria provided The Draft Directions proposed the CRAs to obtain specific approval from RBI for rating CPs, however, the same has been dropped in the New Notification.
Reporting requirement for IPA a.       Report the details of issuance of CP, or its buyback and instances of default on the F-TRAC platform (after these functionalities are made operational), by the same day before the close of business hours.

b.      Until CCIL advises full operationalisation of F-TRAC, the current reporting arrangements shall continue.

a.         Reduced reporting requirement

b.      Report the details of issuance of CP and instances of default on the F-TRAC platform by same day before close of the business hours.

  1. Report the details of issuance of CP on the Online Returns Filing System (ORFS) module of the RBI within 2 (Two) days from the date of issuance of the CP.
  2. On occurrence of default in repayment of CP report to CGM, Financial Markets Department, RBI, Mumbai.
  3. On buyback report CGM, Financial Markets Department, RBI, Mumbai.
Offer document a.       Details of outstanding CPs and other debt instruments as on date of new issuance including date of issuance, amount issued, maturity date, amount outstanding, credit rating, name of credit rating agency and name of IPA

b.      3 (Three) years audited financials or if the issuer has not been in existence for three years, available audited financials, material litigation and regulatory strictures

c.       Default of CPs or any other borrowings for past three years.

d.      Details of current tranche including amount, current credit rating, name of credit rating agency, its validity period and details of IPA

e.       End-use

a.       3 (Three) years audited financial standing

b.      CPs outstanding and new issuance information

c.       Ratings received

d.      Defaults in CPs in the past, including technical defaults.

e.       End use

1 (One) year financial standing to be provided This provides for additional disclosure requirements in the offer document
End use restriction No end use restrictions

The exact end use shall be disclosed in the offer document at the time of issue of a CP.

Current assets and operating expenses. No end use restrictions The exact end use shall be disclosed in the offer document and the proceeds from issue shall be utilised only for the purposes of such end use.

In most cases, CPs are issued for general corporate purposes.

Buy-back CPs a.      Buyback, in full or part, shall be at the prevailing market price.

b.      Buy-back to be extended to all investors and the terms of the buyback should be identical for all investors in the issue.

c.       Cannot buy back before 30 (Thirty) days of issuance

d.       Needs to extinguish once bought back

a.         Cannot buy back before 60 (Sixty) days of issuance

b.      Needs to extinguish once bought back

c.       Buy-back to be extended to all investors

a.    Cannot buy back before 7 (Seven) days of issuance

b.    Buy-back is to be effected through secondary market

 

The waiting period for buy back of CPs have been increased from 7 days to 30 days.

Further, earlier, the Directions did not specify anything regarding the buy-back price, but as per the New Directions, the buy-back has to be done at the prevailing market price.

Settlement of CPs reported on F-TRAC T+0 or T+1 days T+1 days Same day settlement or T+1 days This is same as before.
Credit enhancement a.    A CP shall be issued as a ‘stand-alone’ product.

b.   Banks and FIs may, based on their commercial judgement, choose to provide stand-by assistance/credit, back-stop facility etc. by way of credit enhancement for a CP issue.

c.    Non-bank entities (including corporates) may provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided the offer document for CP properly discloses the net worth of the guarantor company, the names of the companies to which the guarantor has issued similar guarantees, the extent of the guarantees offered by the guarantor company, and the conditions under which the guarantee will be invoked.

CP is unsecured with no credit enhancements feature. Unsecured CP with credit enhancements The credit enhancement provisions providing stand-by support to issuance has also been featured in the new directions.
Reporting Requirement of CRA a.    Continuously monitor the rating assigned to an issue and disseminate rating revisions, if any, to public through its publications and on its website.

b.   Publicly disseminate the ratings of the CP and any subsequent change in the ratings, on the date of rating or change in rating, as the case may be.

No such requirement now CRAs were at discretion to determine the validity period of rating and shall indicate the date when the rating is due for review. The additional disclosure requirements on the CRAs will only increase transparency.

[1] https://rbidocs.rbi.org.in/rdocs/content/pdfs/43CPD10082017.pdf

[2] https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3309

[3] https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10495#2

 

 

[1] https://rbidocs.rbi.org.in/rdocs/content/pdfs/43CPD10082017.pdf

[2] https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3309

[3] https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10495#2

Masala bonds: taking stock of developments so far, by Vallari Dubey

Background

The Reserve Bank of India (RBI), on September 29, 2015, vide circular RBI/2015-16/193 had issued guidelines allowing Indian companies, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to issue rupee-denominated bond (masala bonds) overseas. Consequently, RBI, on April 13, 2016, vide circular RBI/2015-16/372 had reduced the tenure of such bonds to 3 years (previously 5 years) and allowed borrowing upto Rs. 50 billion (previously $ 750 million) under the automatic route. Now vide circular RBI/2016-17/316, RBI has again modified the tenure of these bonds. Interestingly, the tenure has now been segregated into 3 years and 5years respectively; while 3 years are for Masala Bonds raised upto USD 50 million equivalent in INR per financial year and 5 years for bonds raised above USD 50 million equivalent in INR per financial year.

Since its inception only Housing Development Finance Corporation Limited (HDFC) and National Thermal Power Corporation Limited (NTPC) have successfully listed its masala bonds on the London Stock Exchange worth INR 78 billion1 ($1.21 billion) and INR 20 billion ($300 million) respectively. Though HDFC’s masala Bonds are traded on London Stock Exchange (LSE), NTPC’s bonds are traded on both LSE and Singapore Stock Exchange (SGX).

Market Scenario

Masala bonds are in its early days, though, it has potential as, going forward, it can be a game changer for our economy. Not barred by Indian regulators, financial institutions like Inter-American Development Bank, International Finance Corp., and European Bank for Reconstruction and Development, have issued rupee bonds outside India for more than a decade. According to a report by LSE2, currently,  about 38 offshore Indian rupee bonds have listed on its index, raising an approximate amount $4.26 billion. So far, the largest issuance has been made by HDFC Ltd. with an issue size of Rs. 33 billion ($ 510 million).The major Masala Bond issues till date are:

International Issuers

  • Rs 10 billion ($150 million) issue in November 2014 by IFC to fund infrastructure projects in
  • 18 billion ($ 270 million) issue in April 2015 by IFC to support private sector investment in India.
  • Rs 3.15 billion ($47.25 million) issue in August 2015 by IFC to be used for private sector investments that address climate change in
  • Rs 280 million ($4.34 million)

Other issuers of masala bonds include European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IDB), The Province of British Columbia, etc.

Indian Issuers

  • Rs 30 billion ($450 million) issue in July 2016 by HDFC — the first Indian company to issue Masala
  • Rs 20 billion ($300 million) issue in August 2016 by NTPC — the first corporate Green Masala
  • Rs 5 billion issued in September 2016 by HDFC – the whole amount being subscribed by The Province of British Columbia, also raised by issue of masala
  • Rs 10 billion issued in September 2016 by
  • 33 billion ($510 million) issue in March 2017 by HDFC —- the largest issuance by an Indian entity so far, with the purpose of funding the business of the Company

Other Countries

China has been ahead. Masala bonds were not the first local currency bonds issued internationally as similar bonds called as ‘Dim Sum Bonds’ denominated in the Chinese Renminbi (RMB), however issued outside China, were issued in 2007 by the China Development Bank. According to a Citibank July 2016 report3, at present there are a total of 110 Dim Sum Bond issues trading in the market with a par value of RMB 183.10 billion ($27.61 billion) and a market value of RMB 185.22 billion ($27.92 billion) — the average coupon is 4.10%, the Yield to Maturity (YTM) is 4.05% and the average life is 3.34 years, with over 75% bonds being of the investment grade. Since China has been showing rapid growth in its GDP for past years; Dim Sum Bonds have become very attractive and popular, with stock exchanges of Luxembourg, London and Hong Kong being the home of trade for these bonds.

Bond Market in India

Looking at the global trends, bank financing seems to be a less popular borrowing measure as compared to that of bond financing, but the current situation in India follows a totally contrary path.

Bonds are issued without creation of security interest, subject to certain compliances, so as to enable ease of raising of funds by the corporates, in many of the developed countries. Most corporates, do not have assets to create charge in favour of bond/debenture holders, as the assets are already charged in favour of banks. If the corporate had security to offer, it may be easier to access bank loans. It is when   companies exhaust their security interests that they opt for bonds. Bonds are an incremental, additional source of funding, and not the first source of borrowing for most companies. India’s corporate bond market is smaller than 10% of the country’s gross domestic  product. The corporate-bond markets in both China and Brazil are worth 40% or more of their respective GDPs.

Spate of action continues

Earlier, corporates, other than financial entities, were allowed to issue either secured  bonds or bonds compulsorily convertible into equity within a period of 5 years from the date of issuance, anything apart from the said were treated as deposits. However, the Ministry of Corporate Affairs (‘MCA’) vide notification dated June 29, 2016 issued the Companies (Acceptance of Deposits) Amendment Rules, 2016 thereby providing relaxation with respect to issuance of corporate bonds by excluding listed unsecured NCDs from the definition of deposits.

In order to further streamline the process and to lay the oversight the of masala bonds in the regimen of Reserve Bank of India (RBI), MCA and Securities and Exchange Board of India (SEBI) clarified upon the prevailing ambiguities and simplified compliances by Indian issuers providing further ease of business to Indian entities.

The Ministry of Corporate Affairs, on August 3, 2016, clarified vide General Circular No: 09/2016 that Indian companies intending to issue masala bonds under the directives of  RBI are exempt to comply with Chapter III of the Companies Act, 2013 and Rule 18 of Companies (Share Capital and Debentures) Rules, 2014. By this exemption, Indian issuer companies will not only be required to comply with the procedural norms relating to public issue and private placement disclosures but are also exempted to from complying with the provisions governing issue of debentures. Previously, MCA vide General Circular No. 43/2014 had clarified that provisions of Chapter III of the Companies Act, 2013 will not apply to issue of issue of a Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Bonds (FCBs) made exclusively to persons resident outside India in accordance with RBI directives. Similarly, MCA vide notification dated March 18, 2015 issued the Companies (Share Capital and Debentures) Amendment Rules, 2015 thereby clarifying the provisions relating to Rule 18 shall not apply to FCCBs and FCBs issued only to persons resident outside India in accordance with RBI directives.

Technically, masala bonds are not covered under the ambit of foreign currency bonds, as masala bonds are predominantly rupee denominated. However, many in    the industry had the view that masala bond would get covered under the aforementioned relaxation under the Companies Act, 2013. Thus the clarification by MCA puts rest to these  ambiguous stands prevailing in the market.

Securities Exchange Board of India (SEBI), vide circular on August 4, 2016, also clarified that such in masala bonds under the RBI directives will not be treated as investments by Foreign Portfolio Investors (FPIs) and will not come under the purview of the SEBI  (Foreign Portfolio Investors) Regulations, 2014. Foreign investments in Masala Bonds will be reckoned against the existing corporate debt limit set for investment by FPIs, presently at INR 244,323 crore and will be available on tap to the foreign investor. The depositories are also requested to put in place necessary systems for receiving data on foreign investments in masala bonds from RBI on a periodic basis.

Boost for NBFCs

HDFC having already set the precedent for issue of masala bonds by a non-banking finance company, experts of the financial markets are of the view that big NBFCs are expected to issue masala bonds in good quantum over the next months. By enabling issuance of masala bonds, it has opened up new avenues for raising international finance for Indian corporates. The bond market in India is mainly dominated by NBFCs as issue of unsecured bonds by NBNFCs, until recently, were covered under the ambit of deposits. So, there were very few corporates left, who after securing assets with banks, had reasonable security to access the bond market. The same can be depicted by the chart below:

Source: Reserve Bank of India

Also, with the precedent being already set by HDFC, big NBFCs are expected to leverage out benefits of this mechanism. India, along with China and Brazil, is that rare fast-growing large economy, so investing in masala bonds is one of the rare ways for investors to take advantage of this.

Expectations not met

India’s attempt to diversify its debt market and take leverage by issue of masala bonds has not been what it was originally thought to be. A global pullback from emerging markets, volatility in the rupee currency among other backdrops has made them unattractive to  both investors and issuers. Indian corporate giants are struggling as the amount they have to service their dollar and euro debt has substantially increased as the South Asian currency has depreciated over the past year(s). The volatility in Indian currency since then has been adding to investors’ concerns over investments in the currency.

Dewan Housing Finance Corporation Limited (DHFL) had conducted road shows in Singapore and Hong Kong to gauge investors’ mood has put its plans on hold “due to unfavourable market conditions.” Among others, Indian Railway Finance Corp. (IRFC), Shriram Transport Finance and Adani Transmission Ltd have all wanted to explore the masala bonds market with no success. Initially, HDFC and NTPC had also put their plans on rest, but later revisited these plans and successfully issued masala bond.

 

To attract the foreign investors, The Ministry of Finance has slashed the withholding tax on interest income of masala bonds from 20 per cent to 5 per cent, making it lucrative for investors. Also, capital gains from rupee appreciation are exempted from tax. However, the depreciation in currency is hampering India’s efforts to spread the use of the rupee as an international currency, diversify its source of funds and reduce its dollar liabilities.

Conclusion

The benefits of issuance of masala bonds are manifold as there can be acceleration in fixed income market. Further, once the masala bond entices investors in the offshore market, then it will also play a vital role in revitalizing the Indian currency. One such example is rising demand for Dim-Sum Bonds, which has led to significant appreciation of RMB as well as offered investment avenues for RMB holders based outside of China. But also, this has been the biggest reason for its downturn as so far as Indian companies has not been able to convince investors that masala bonds are a good bet.

Also, too much of reliance on external debt by way of raising funds through masala bonds along with issuances of traditional ECBs can have a negative impact on the global image of India, and thereby creating a problem of attracting investments to India.

RBI adds more masala to the bonds: issues circular to further rationalise Masala Bonds Framework, by Vallari Dubey

The Reserve Bank of India vide its powers given under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999, has issued a circular A. P. (DIR Series) Circular No.47, dated 7th June, 2017[1] bringing in fresh amendments to the existing provisions for ‘Issuance of Rupee denominated bonds overseas’ and as we call it in normal parlance, ‘Masala Bonds’. Read more

SEBI formalises guidelines for issuance of Green Debt Securities in India, by Abhirup Ghosh

The Securities and Exchange Board of India (SEBI) on 30th May, 2017 came out with a circular stating the disclosure requirements for issuance and listing of Green Debt Securities in India (hereinafter referred to as “Circular”)[1]. Earlier in December, 2015, SEBI had come out with a concept paper for issuance of Green Bonds in India (hereinafter referred to as “Concept Paper”)[2]. The Concept Paper brought out the need for enhanced disclosures for issuance of green bonds so as to differentiate it from other form of debt securities issued and listed in India and the Circular is largely in line with the concept paper. Read more