To ensure that individual investors’ losses are minimised in case issuers default on short-term financial instruments, the Reserve Bank of India has limited their investment in primary issuances to a quarter of the total issuance.
Further, issuers of commercial papers (CPs) and non-convertible debentures (NCDs) have to disclose information on any default in payments through various channels, including publicly disseminating such information through their website, per RBI’s revised master direction on CPs and NCDs of original or initial maturity up to one year.
Capping the total subscription by all individuals, including Hindu Undivided Families, (HUF) in any primary issuance of CPs or NCDs to 25 per cent of the total amount issued could curb their tendency to go overboard and invest, lured by high rate of interest.
Earlier, there was no limit for individual investors’ investment, say market experts. CPs and NCDs are issued in minimum denomination of ₹5 lakh and in multiples of ₹5 lakh thereafter.
“While institutional investors and high networth individuals are conversant with the dynamics of the debt market, individual investors are not. So, the RBI’s measure to cap individual investors, including HUFs, investment in short-term debt instruments is aimed at protecting them,” said Ashish Agrawal, Director, Resurgent India Ltd.
Category expanded
The central bank has also expanded the category of CP and NCD issuers to include Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs).
In addition, co-operative societies and limited liability partnerships with a minimum net-worth of ₹100 crore too can issue CPs. This is subject to the condition that all fund-based facilities availed, if any, by the issuer from lenders are classified as standard at the time of issue.
Referring to one of the clauses in the direction that requires defaulting issuers to publicly disseminate information on default through their website, Agrawal said it remains to be seen if such issuers will adhere to this prescription in letter and spirit.
He opined that a penalty for non-adherence to the aforementioned clause can ensure that defaulting issuers will fall in line.
Venkatakrishnan Srinivasan, Founder and Managing Partner of Rockfort Fincap LLP, said the direction requires more disclosures to be made by CP and NCD issuers. So, if an issuer has obtained long-term credit rating, the same has to be disclosed in the offer document.
Further, unaccepted credit ratings, if any, assigned to the issuer too needs to be disclosed.