The Reserve Bank of India (RBI) has recently introduced revised guidelines for the issuance of commercial papers (CPs) and non-convertible debentures (NCDs) of up to one year. This move aims to regulate short-term investments and enhance transparency in the market. The new norms, effective from April 1, 2024, mandate issuers to clearly specify the end use of the funds raised through these instruments, with a specific exclusion for financing current assets and operating expenses.
For improved transparency, the guidelines require issuers to disclose both long-term and unaccepted credit ratings in their offer document. This disclosure is intended to assist investors in making informed decisions by understanding the risks associated with their investments. The RBI’s aim with these changes is to instill greater discipline among issuers regarding the utilization of the funds they raise.
Additionally, the settlement period for these transactions has been capped at T+4, meaning they must be settled within four days from the trade date. There’s also a restriction on individual investors and Hindu Undivided Families (HUF), limiting their investment to a maximum of 25 percent of their total income. The guidelines also specify that redemptions need to be made before 3 pm on the maturity date.
In terms of market response, CP issuances have been increasing, and the RBI is taking a cautious approach with these guidelines. For instance, companies and financial institutions raised Rs 1.1 trillion through CPs in December, an increase compared to Rs 1 trillion in November. Non-banking finance companies raised Rs 69,380 crore in December, a 26 percent increase from the previous month, while manufacturing companies saw a 14 percent decline in issuances.
These new regulations are part of the RBI’s ongoing efforts to enhance the safety and transparency of the money market and to ensure that funds raised through CPs and NCDs are used responsibly and for the intended purposes