INTRODUCTION
On January 3, 2024, the Reserve Bank of India ("RBI") issued the Master Directions on Commercial Paper and Non-Convertible Debentures with an original or initial maturity of up to one year, 2024 ("Master Directions"). These directions supersede the existing RBI guidelines on the issuance of Commercial Papers ("CPs") and non-convertible debentures with a maturity of less than one year ("Money Market NCDs") previously governed by: (a) Master Direction on Money Market Instruments: Call/Notice Money Market, Commercial Paper, Certificates of Deposit, and Non-Convertible Debentures (original maturity up to one year, dated July 7, 2016; and (b) the Reserve Bank Commercial Paper Directions 2017 ("Erstwhile Framework").
The Erstwhile Framework, which previously governed the issuances of CPs and Money Market NCDs, was fragmented across various RBI directions. The new Master Directions which shall come into force from April 1, 2024, consolidates the entire framework governing issuances of CPs and Money Market NCDs.
KEY CHANGES
The RBI had updated the regulatory framework governing the issuance of Money Market NCDs in 2016, which has now, pursuant to the Master Directions, been further revised and aligned to the more recent framework applicable to CPs. In order to encapsulate the key changes from the Erstwhile Framework, the summary of the said takeaways from the Master Directions have been tabulated below.
CHANGES IN THE MONEY MARKET NCD FRAMEWORK
Set out below are the key changes introduced by the Master Directions pertaining to Money Market NCDs with an original maturity of up to one year:
(a) Eligible Investors
IndusLaw Comment: The new Master Directions expand the scope of eligible investors for Money Market NCDs, including individuals, unincorporated bodies, and all non-residents to the extent permitted under the Foreign Exchange Management Act, 1999.
However, it must be noted that the subscription by individuals (including HUFs) is capped at 25% (twenty five percent) of the principal amount of the Money Market NCDs issued.
No resident or non-resident investor is permitted to invest in NCDs issued by related parties either in the primary or through the secondary market. Earlier, only the investors in CP issuances were restricted to not invest in case the issuer was a related party. Now this restriction has been extended for Money Market NCDs issuances as well.
(b) Issue terms
IndusLaw Comment: The Master Directions have considerably amended the issue terms for Money Market NCDs. Noteworthy changes include a substantial increase in the trading lot size of Money Market NCDs, transitioning from INR 1 (one) Lakh to INR 5 (five) Lakh (equivalent to the face value). The increased threshold of rating requirements from 'A2' to 'A3' reflects the RBI's intent to ensure higher credit quality for such Money Market NCD issuances.
Further, Money Market NCDs are now permitted to be traded on secondary markets either in OTC markets, including on electronic trading platforms, or recognised stock exchanges, approved by the RBI. Additionally, a notable restriction prohibits the use of call/put options in the case of Money Market NCDs, marking a significant shift from the Erstwhile Framework which allowed the usage of call/put options post 90-day period. This modification may curtail the flexibility of investors seeking to exit their investments from such Money Market NCDs.
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