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Relaxed norms for private placement of NCDs by NBFCs

Finsec Law Advisors

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RBI had issued circulars dated 27 June, 2013, and July 02, 2013, to regulate NBFCs which had been raising considerable resources from the retail public through private placement of debentures. RBI has issued a circular dated February 20, 2015, revising the norms on private placement of NCDs (having maturity more than 1 year) by NBFCs, to align them with the provisions of the Companies Act, 2013, to the extent possible, and wherever required, to override the same.

The minimum subscription per investor has been decreased from Rs. 2.5 million and multiples of Rs. 1 million thereafter to Rs. 20,000. This would attract smaller investors who have an investible surplus of Rs. 20,000. The issuance shall be in two separate categories: those with a maximum subscription of less than Rs. 10 million, and those with a minimum subscription of Rs. 10 million and above per investor. In the first route, there shall be a maximum of 200 subscribers in a financial year and the subscription shall be fully secured. However, there will be no limit on the number of subscribers under the second category and issuers will have the option to create security in favour of the subscribers.

Further, it has been clarified that unsecured debentures shall not tantamount to public deposits under the NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998. Under the existing regime, unsecured bonds are treated as public deposits and hence, debentures issued by NBFCs had to necessarily be secured and issued as per section 71 of the Companies Act, 2013 and rules made thereunder. This caused significant hardships for NBFCs as the security has to be “tangible” and by way of “specific” assets.

The restriction on NBFCs (excluding core investment companies) to issue debentures only for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities/ parent company/ associates, has been retained from the earlier guidelines. Similarly, the requirement for NBFCs to put in place a Board approved policy for resource planning that should cover the planning horizon and periodicity of private placement, continues to be in place under the revised guidelines. The revised guidelines are not applicable to tax exempt bonds offered by NBFCs. The revised guidelines will facilitate in the development of the corporate bond market and help meet the long-term financing needs of companies.