What changed
The amendment to the Issuance of Non-Convertible Debentures Directions, 2010 now permits Financial Institutions to invest in NCDs with maturity up to one year. It also allows Non-Banking Financial Companies and Primary Dealers that do not maintain a working capital limit to issue such NCDs. Additionally, Foreign Institutional Investors can invest in these NCDs, subject to FEMA and SEBI guidelines.
What it means for you
Banks and lenders can now see increased demand for short-term NCDs from FIs and FIIs, broadening the investor base. NBFCs and PDs without working capital limits gain a new funding avenue, potentially easing liquidity. However, banks must ensure compliance with their own regulatory approvals when investing in these instruments.
What you must do
- Review your bank's investment policy to include NCDs up to one year from FIs and NBFCs/PDs.
- Ensure any FII investment in NCDs complies with FEMA and SEBI limits and reporting.
- Update credit assessment frameworks for NBFCs/PDs issuing NCDs without working capital limits.
- Monitor standard asset classification for corporate issuers as per the eligibility criteria.
Who it affects
Banks investing in short-term NCDs, Financial Institutions (FIs), Non-Banking Financial Companies (NBFCs) including Primary Dealers (PDs), Foreign Institutional Investors (FIIs), Corporate issuers of NCDs
What is the minimum tangible net worth required for a corporate to issue NCDs under these directions?
A corporate must have a tangible net worth of at least Rs. 4 crore as per the latest audited balance sheet.
Are NBFCs and Primary Dealers exempt from any eligibility criteria?
Yes, NBFCs and Primary Dealers are exempt from the requirement of having a sanctioned working capital limit or term loan from banks or financial institutions.
Do FIIs face any additional restrictions when investing in these NCDs?
Yes, FII investments must comply with FEMA provisions and SEBI guidelines, including any limits set by SEBI from time to time.