Draft guidelines on short-term NCDs: key issues

With a view to regulating short-term debentures, the Reserve Bank of India (RBI) placed on its website on 3 November 2009 draft guidelines on issuing non-convertible debentures (NCDs) of maturity less than one year. These guidelines will complement the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 (which regulate long-term listed debt) and enable further development of an active corporate bond market in India.

The High Level Co-ordination Committee on Financial Markets has stated that these instruments need to be regulated as they have systemic implications. While the objective behind the draft guidelines is noteworthy, certain provisions may hinder the development of the bond market. This article lists some of the provisions in the draft guidelines that ought to be reconsidered and also evaluates the legal regime for NCDs vis-à-vis commercial papers (CPs).

Although the draft guidelines define NCDs as “negotiable money market instruments”, it would be prudent to define NCDs only as “debt instruments”. Negotiable by its very meaning implies transferability, whereas NCDs may be non marketable depending on their terms and conditions.

Prachi Loona and Suprio Bose are associates at Juris Corp, a Mumbai-based firm that specializes in banking and finance, foreign investments, private equity, direct tax, bankruptcy and restructuring, M&A, insurance, energy and infrastructure, dispute resolution and international arbitration.