Bond Issuance by HFCs: RBI aligns norms with those for NBFCs
Harshita Malik (finserv@vinodkothari.com)
Introduction:
While all issuance of debentures are governed by general laws under Companies Act, 2013 and SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (for listed debentures), debt issuance (with maturity of more than one year) on a private placement basis, by financial entities are also subject to additional regulatory requirements issued by RBI and NHB for NBFCs and HFCs respectively. Notable, the guidelines for HFCs were stricter and more detailed than those for NBFCs imposing a higher level of regulatory oversight and compliance requirements for HFCs.
The RBI vide its circular dated the 29th of January, 2025, has made a significant modification to the HFC Master Directions stating that the guidelines applicable to NBFCs for issuance of NCDs (with a maturity of more than one year) shall mutatis mutandis apply to debenture issuances by HFCs. Accordingly, additional requirements applicable to HFCs stand deleted. Such change reflects a deliberate effort of the regulator to streamline and simplify the regulatory framework, while simultaneously easing the compliance burden for HFCs in issuing NCDs. This is in line with the overall objective of reducing the compliance burden for debt issuances through private placements, which are primarily targeted at institutional and informed investors.
In any case, NCD issuances will still be governed by other regulatory provisions. Where the existing NCDs are listed, the SEBI principle w.r.t. ‘once listed to be always listed’[1] shall continue to apply, thereby requiring listed HFCs to list every subsequent NCDs and comply with governance norms under SEBI Regulations.
It shall be noted that these guidelines are only applicable to NCDs with a maturity period of more than one year, while short-term NCDs with maturity of less than one year, shall be governed by the Master Direction – Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of Original or Initial Maturity Up to One Year) Directions, 2024.
Applicability:
This circular shall be applicable to all fresh private placements of NCDs (with maturity more than one year) by HFCs from the date of this circular, that is January 29, 2025.
Analysis of Changes:
It appears that the RBI has effectively removed such provisions from the HFC Master Directions that were not explicitly mirrored in the SBR Master Directions. The newly inserted Para 56A, drawn verbatim from Para 58 of the SBR Master Directions, retains only such provisions that are common for both .
An analysis of the impact on the applicable provisions of the HFC Master Directions is provided in the table below:
| Para No. | Particulars | Applicability | Impact of the change | |
| Earlier | Now | |||
| 57.1 | Use of NCD proceeds for balance sheet funding only | ✅ | ✅ | No change in the purpose of issue |
| 57.2 | Prohibition on issuing NCDs for group or parent company use | ✅ | ✅ | |
| 58.1 | Minimum maturity period of 12 months for NCDs | ✅ | X | Removal of restrictions on exercise date, roll-over and tenor of the NCDs. However, as discussed, these guidelines will only be applicable for NCDs with a tenure of more than one year and short-term debentures will be governed by separate guidelines. Further, where the Company has obtained credit rating, quite naturally, the tenor would not exceed the validity period. |
| 58.2 | Option exercise date must exceed one year from issue date | ✅ | X | |
| 58.3 | Roll-over of NCDs- not allowed | ✅ | X | |
| 58.4 | Tenor of NCDs limited to Credit Rating validity period | ✅ | X | |
| 59.1 | Requirement of Credit Rating from approved agencies for issuing NCDs | ✅ | X | No requirement to obtain credit rating for issuance of NCDs |
| 59.2 | Minimum credit rating requirement for timely servicing of obligations | ✅ | X | Since no requirement to mandatorily obtain credit rating, this provision would no longer be relevant |
| 59.3 | Ensure current and valid credit rating at NCD issuance | ✅ | X | No need to ensure current and valid Credit Rating for NCD issuance |
| 60.1 | Subscriber limit and security requirement for NCDs with maximum subscription of less than ₹1 crore | ✅ | ✅ | No change in maximum number of investors and minimum amount of subscription per investor |
| 60.2 | No subscriber limit or requirement for security creation for NCDs with maximum subscription of ₹1 crore and above | ✅ | ✅ | |
| 60.3 | Minimum subscription of ₹20,000 per investor | ✅ | ✅ | |
| 60.4 | Two categories for private placement of NCDs based on subscription amount | ✅ | ✅ | |
| 61.1 | Limit on on amount of NCD issuance based on Board approval or credit rating agency guidelines | ✅ | X | Since credit rating is not mandatory, the requirement does not seem relevant. However, if the HFC obtains credit rating, naturally, the amount of issuance under such rating will be limited to the amount stated in the letter. |
| 61.2 | Completion of NCD issuance within 30 days of opening | ✅ | X | No time limit for completion of the issue. However, the time lines under Companies Act, 2013 and SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 will apply. |
| 62.1 | Board-approved policy for resource planning and NCD issuance | ✅ | ✅ | No change in the requirement of a Board approved policy |
| 62.2 | Offer document for private placement of NCDs to be issued within 6 Months of Board resolution | ✅ | X | No timeline is there within which offer document has to be issued from the date of passing of board resolution. |
| 63.1 | Disclosure requirements in offer document for private placement of NCDs | ✅ | X | The requirement for disclosure in offer documents as per the HFC Directions has been removed. However, the HFCs shall continue to comply with the disclosure requirements as per Section 42 of the Companies Act, 2013 read with Rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 and Regulation 28 of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 in case of issuance of listed NCDs |
| 63.2 | Auditor’s certification requirement | ✅ | X | No requirement for obtaining auditor’s certificate |
| 63.3 | Compliance with Companies Act, SEBI Regulations, and other applicable laws | ✅ | ✅ | While the said provision has not been retained, in any case, any debt issuance will be subjected to provisions of Companies Act, 2013 and Rules framed thereunder shall be applicable, wherever not contradictory, along with other applicable laws. |
| 63.4 | Issuance of Debenture Certificate in accordance with legal timeframe | ✅ | X | This paragraph becomes redundant, as SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and Rule 9A and Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, stipulate that securities, must be issued in dematerialized form only. |
| 64.1 | Appointment of Debenture Trustee for each issue | ✅ | X | No need to appoint a Debenture Trustee |
| 64.2 | Eligibility criteria for Debenture Trustee | ✅ | X | |
| 64.3 | Submission of information by HFCs, based on information provided by theDebenture Trustee, as required by NHB | ✅ | X | |
| 65.1 | Requirement for fully secured NCDs | ✅ | X | This would be relevant only where the debentures are secured in nature. This requirement has been deleted, however, applicable provisions under Companies Act and SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021/SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 will be applicable in case of security creation for secured debentures. |
| 65.2 | Escrow arrangement for insufficient security cover | ✅ | X | |
| 65.3 | Exemption for hybrid or subordinated debt | ✅ | X | |
| 65.4 | Exemption for NCDs with a maturity of more than one year and having the minimum subscription per investor at ₹1 crore and above | ✅ | X | |
| 66 | Preference for issuance of NCDs in dematerialized form | ✅ | X | Directions no longer prescribe a preferred mode of issuance, however, SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and Rule 9A and Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, stipulate that securities, must be issued in dematerialized form only. |
| 67 | Prohibition on loans against own debentures | ✅ | ✅ | Restrictions on extension of loans against security of HFCs’ own debentures continues |
| 68.1 | Disclosure in the Board’s report requirements on unclaimed or unpaid NCDs | ✅ | X | No requirement of disclosures in the Board’s report. However, disclosure requirements as per applicable laws will continue to apply |
| 68.2 | Disclosure in the Board’s report requirements on the remaining unclaimed or unpaid NCDs | ✅ | X | |
| 68A | Exemption for tax-exempt bonds issued by HFCs | ✅ | ✅ | Exemption from applicability of these Directions given to tax exempt bonds continues |
[1] https://www.sebi.gov.in/media/press-releases/jun-2023/sebi-board-meeting_73278.html
Our article on the same can be read here-
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