The Reserve Bank of India ("RBI") has taken a significant step towards streamlining the money market by issuing the Master Direction titled 'Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of original or initial maturity upto one year) Directions, 2024' (hereinafter referred to as "The Master Directions" for the sake of brevity and convenience) These comprehensive guidelines consolidate previous fragmented regulations, aiming to create a more efficient and accessible market for short-term financing. This initiative aligns with the RBI's vision of fostering a robust money market that can effectively address liquidity gaps and support businesses.
The Master Directions introduce a significant shift in investor eligibility for Money Market Non-Convertible Debenture ("NCD"). Previously, these instruments were accessible to a select group of individuals, banks, and institutional investors. However, the new framework broadens the investor base to encompass all residents and non-residents[1], as permitted by the Foreign Exchange Management Act (FEMA). This move signifies a more inclusive and accessible market, potentially attracting broader participation and enhancing liquidity.
It's worth noting that individuals are subject to a 25% investment cap, ensuring balanced participation across investor segments. Additionally, investments by related parties remain prohibited, safeguarding against potential conflicts of interest. While banks and primary dealers still require approval from their respective regulators, the Master Directions eliminate the need for explicit RBI approval for their investments, streamlining the process and fostering market efficiency. This expansion in investor eligibility aligns with the RBI's vision of creating a vibrant and accessible money market. By opening doors to a wider range of participants, the Master Directions pave the way for increased market depth and improved access to short-term financing for eligible issuers.
Furthermore, secondary market trading possibilities expand to encompass both Over-the-Counter (OTC) markets and approved stock exchanges, potentially enhancing liquidity and facilitating broader investor access. However, a critical change prohibits the use of call/put options, departing from the previous framework's allowance after 90 days. This might limit investor exit flexibility while aligning to promote longer-term commitments within the Money Market NCD segment.
The Master Directions outline specific requirements for the primary issuance of Commercial Paper ("CP") and Money Market NCDs. Both instruments must be issued in dematerialized form with a minimum denomination of INR 5 lakh. CPs are issued at a discount to face value, while NCDs offer greater flexibility with discount issuance or fixed/floating rate coupons linked to various benchmarks[2]. Tenor ranges from 7 to 365 days for CPs and 90 to 365 days for NCDs. Settlements occur within 4 days (primary) and 1 day (secondary) after the agreement, with call/put options prohibited. Underwriting and co-acceptance are banned, and issuers must disclose the intended use of funds. Both CP and NCD issuances require an Issuing and Payment Agent ("IPA"), with NCDs additionally requiring a Debenture Trustee ("DT"). Finally, a minimum credit rating from 'A2' to 'A3' is mandatory for both instruments. These regulations aim to create a standardized and transparent primary issuance process for CPs and NCDs.
After issuance, the issuer imposes limitations on issuing new instruments in case of defaults on coupon payments or repayment, barring issuance until the debt is settled or six months after the default, as specified. Buyback options are activated after 7 days for CPs and 90 days for NCDs, overseen by the IPA or DT. All parties involved—issuers, IPAs, depositories, and DTs—must comply with specified reporting obligations. These measures mark a significant stride towards fostering a more inclusive, efficient, and transparent money market, benefiting both issuers and investors.
In conclusion, the comprehensive guidelines set forth in The Master Directions not only consolidate and refine fragmented regulations but also strategically align with the RBI's vision of cultivating a robust money market. By expanding the investor base for Money Market Non-Convertible Debentures, introducing stringent investment caps, and prohibiting related party investments, the Master Directions promote inclusivity and mitigate potential conflicts of interest. The streamlining of approval processes for banks and primary dealers enhances market efficiency, fostering a more vibrant and accessible money market. Further, the delineation of specific requirements for the primary issuance of Commercial Paper and Money Market NCDs, coupled with the activation of buyback options and adherence to reporting obligations, marks a significant stride towards transparency, efficiency, and inclusivity in the financial landscape. In essence, the Master Directions represent a transformative initiative that is poised to benefit both issuers and investors by creating an environment conducive to sustained financial growth.
[1] Refer Para 4 of The Master Directions (hereinafter all citations are taken from The Master Direction)
[2] These benchmarks are designated by a Financial Benchmark Administrator or endorsed by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) specifically for this use to ensure transparency & impartial transactions. Additionally, the interest rate on floating rate NCDs may also be connected to policy rates released by the Reserve Bank. - Refer Para 5(b)(iii)
