DBS.FID.No. C-8/01.02.00/2003-04

November 4, 2003

The CEOs of all-India Term Lending and Refinancing Institutions

Dear Sir,

Draft guidelines on investment by the FIs in debt securities

The matter of regulating resource raising by the listed companies through private placement of debt had been under consideration of SEBI. SEBI has since issued a Circular (No. SEBI/MRD/SE/AT/36/2003/30/9 dated September 30, 2003 – copy enclosed at Annex 1) prescribing the guidelines to be complied with by the listed companies issuing debt securities through private placement.

2. Since the FIs too acquire debt instruments issued by corporate entities, from the primary as well as secondary market, guidelines as per Annex 2, have been drafted and are proposed to be issued to the FIs by the RBI. The guidelines seek to address the risks arising from investment in non-government debt securities, particularly through private placement, and, inter alia, cover the following aspects:

1. the need for strengthening the internal rating systems of the FIs;

2. prudential limits on the exposure through debt securities;
3. review by the Board of Directors of the FIs; and
4. public disclosures in the ‘Notes on Accounts’ to the balance sheet.

3. You are requested to please furnish your comments / feedback on the enclosed draft guidelines within a week from the date of this Circular, to enable us to finalise the proposed guidelines. The draft guidelines are also accessible at the RBI website (URL : www.rbi.org.in).

Yours faithfully,

(S S Gangopadhyay)
Chief General Manager

 

ANNEX – 1

Copy of The SEBI Circular dated September 30, 2003

Deputy General Manager
Market Regulation Department – Policy
Email:-sundaresanvs@sebi.gov.in
Tel : 22845355 Fax: 22845761

SEBI/MRD/SE/AT/36/2003/30/09

September 30, 2003

The Executive Directors/Managing Director/Administrators
Of All Stock Exchanges

Dear Sir/Madam,

Sub: Secondary Market for Corporate Debt Securities.

1. Companies have been issuing debt securities on private placement basis from time to time. In order to provide greater transparency to such issuances and to protect the interest of investors in such securities, it has been decided that any listed company making issue of debt securities on a private placement basis and listed on a stock exchange shall be required to comply with the following:-

1.1. The company shall make full disclosures (initial and continuing) in the manner prescribed in Schedule II of the Companies Act, 1956, SEBI (Disclosure and Investor Protection) Guidelines, 2000 and the Listing Agreement with the exchanges. However, if the privately placed debt securities are in standard denomination of Rs.10 Lakhs, such disclosures may be made only through web sites of the stock exchange where the debt securities are sought to be listed.

1.2. The debt securities shall carry a credit rating of not less than investment grade from a Credit Rating Agency registered with the Board.

1.3. The company shall appoint a debenture trustee registered with SEBI in respect of the issue of the debt securities.

1.4. The debt securities shall be issued and traded in demat form.

1.5. The company shall sign a separate listing agreement with the exchange in respect of debt securities and comply with the conditions of listing.

1.6. All trades with the exception of spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange.

1.7. The trading in privately placed debts shall only take place between Qualified Institutional Investors (QIBs) and High Networth Individuals (HNIs), in standard denomination of Rs.10 lakhs.

1.8. The requirement of Rule 19(2)(b) of the Securities Contract (Regulation) Rules, 1957 will not be applicable to listing of privately placed debt securities on exchanges, provided all the above requirements are complied with.

1.9. If the intermediaries registered with SEBI associate themselves with the issuance of private placement of unlisted debt securities, they will be held accountable for such issues. They will also be required to furnish periodical reports to SEBI in such format as may be decided by SEBI.

2. The stock exchanges are directed to:

2.1 make necessary amendments to the listing agreement, bye-laws, rules and regulations for the implementation of the above decision immediately, as may be applicable.

2.2 bring the provisions of this circular to the notice of the listed companies/member brokers/clearing members of the Exchange and also to disseminate the same on the website for easy access to the investors; and

2.3 communicate to SEBI, the status of the implementation of the provisions of this circular in Section II, item no. 13 of the Monthly Development Report for the month of October 2003.

3. This circular is being issued in exercise of powers conferred by section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with section 10 of the Securities Contracts (Regulation) Act 1956, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Yours faithfully,

Sd/-
V S SUNDARESAN

 

ANNEX - 2

Guidelines on Investments by The Select All-India FIs in Non-Government Debt Securities

1. Coverage

These guidelines apply to the FIs’ investments, both in the primary market (public issue as also private placement) as well as the secondary market, in debt instruments issued by companies, banks, FIs and State and Central Government sponsored institutions, SPVs, etc., but do not apply to government securities and securities which are in the nature of advance under the extant prudential norms of RBI.

2. Definitions

2.1 Rated security: A security will be treated as rated if it is subjected to a detailed rating exercise by an external rating agency in India which is registered with SEBI and is carrying a current or valid rating. The rating relied upon will be deemed to be current or valid if:

1. The credit rating letter relied upon is not more than one month old on the date of opening of the issue, and

2. The rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and
3. The rating letter and the rating rationale are a part of the offer document.
4. In the case of secondary market acquisition, the credit rating of the issue should be in force and confirmed from the monthly bulletin published by the respective rating agency.

2.2 Unrated security: Securities which do not have a current or valid rating by an external rating agency would be deemed as unrated securities.

2.3 Listed debt security: It is a security, which is listed on a stock exchange. If not so listed, it is an ‘unlisted’ debt security.

2.4 Non performing investment (NPI): For the limited purpose of these guidelines, an NPI (similar to a non performing advance (NPA) is one where:

1. In respect of fixed / predetermined income securities, interest / principal / fixed dividend on preference shares (including maturity proceeds) is due and remains unpaid for more than 180 days.

2. The equity shares of a company have been valued at Re. 1/- per company, on account of the non-availability of the latest balance sheet (as per the instructions contained in para 26 of the Annexure to circular DBS.FID. No.C-9/01.02.00/ 2000-01 dated November 9, 2000)

3. If any credit facility availed by the issuer of the security is classified as NPA in the books of the FI, investment in any of the securities issued by the same issuer would also be treated as NPI.

3. Regulatory requirements

3.1 The FIs must not invest in unrated debt securities but only in rated ones, which carry a minimum investment grade rating from a credit rating agency registered with SEBI.

3.2 The investment grade rating should have been awarded by an external rating agency, operating in India, as identified by the IBA/ FIMMDA. The list of such agencies would also be reviewed by IBA / FIMMDA at least once a year.

3.3 The FIs should not invest in debt securities of original maturity of less than one-year other than Commercial Paper and Certificates of Deposits, which are covered under the RBI guidelines.

3.4 The FIs should undertake usual due diligence in respect of investments in debt securities.

3.5 The FIs should ensure that all fresh investments in debt securities are made only in listed debt securities of companies, which comply with the requirements of the SEBI circular No. SEBI/MRD/SE/AT/36/2003/30/9 dated September 30, 2003, except to the extent indicated in paragraph 3.5 below.

3.6 The unlisted debt securities in which the FIs may invest up to the limits specified in paragraph 5 below, should be rated and disclosure requirements as prescribed by the SEBI for listed companies should be followed by the issuer company.

4. Internal assessments

Since the debt securities are very often a credit substitute, the FIs would be well advised to:

1. subject all their investment proposals relating to debt securities to the same standards of credit appraisal as for their credit proposals, irrespective of the fact that the proposed investments may be in rated securities;

2. make their own internal credit analysis and assign internal rating even in respect of externally rated issues and not to rely solely on the ratings of external rating agencies; and

3. strengthen their internal rating systems which should also include building up of a system of regular (quarterly or half-yearly) tracking of the financial position of the issuer with a view to ensuring continuous monitoring of the rating migration of the issuers / issues.

5. Fixing of prudential limits

5.1 The Board of Directors of the FIs should fix a prudential limit for their total investment in debt securities (other than government securities and those in the nature of advance) and sub-limits for the following categories of debt securities:

1. unlisted securities; and

2. Mortgage Backed Securities (MBS) and securitisation papers issued by the SPVs for infrastructure projects.

The total investment in (a) and (b) above should not exceed 20 per cent of the FIs’ total investment in debt securities (other than government securities and those in the nature of advance) as on March 31(June 30 in case of NHB), of the previous year, with a sub-ceiling of 10 per cent for investments covered under (a) above.

5.2 The FIs which have exposure to investments in debt securities in excess of the prudential limit prescribed at para 5.1 above as on March 31, 2003 (June 30, 2003 in case of NHB) should not make any fresh investment in such securities till they ensure compliance with the above prudential limit.

5.3 As a matter of prudence, the FIs should stipulate, with the approval of the Board, minimum ratings / quality standards for acquiring exposure in debt securities (other than government securities and those in the nature of advance) and industry-wise, maturity-wise, duration-wise, issuer-wise, etc., exposure limits to address the concentration risk and the risk of illiquidity.

6. Role of the Boards of Directors

6.1 The FIs should ensure that their investment policies, duly approved by the Board of Directors, are formulated duly taking into account all the relevant aspects specified in these guidelines. The FIs should put in place proper risk management systems for capturing and analysing the risk in respect of investment in debt securities and for taking timely remedial measures. The FIs should also put in place appropriate systems to ensure that investment in privately placed instruments is made in accordance with the systems and procedures prescribed under the FI’s investment policy.

6.2 The Board should put in place a monitoring system to ensure that the prudential limits prescribed in paragraphs 5 above are scrupulously complied with, including the system for addressing the breaches, if any, due to rating migration.

6.3 Boards of the FIs should review the following aspects of investment in debt securities, twice a year:

1. Total turnover (investment and divestment) during the reporting period;

2. Compliance with the prudential limits prescribed by the Board for such investments;

3. Rating migration of the issuers / securities held in the books of the FIs and consequent diminution in the portfolio quality; and

4. Extent of non-performing investments in the fixed income category.

7 Reporting requirements

7.1 In order to help in the creation of a central database on private placement of debt, the investing FIs should file a copy of all offer documents with the Credit Information Bureau (India) Ltd. (CIBIL). When the FIs themselves raise debt through private placement, they should also file a copy of the offer document with CIBIL.

7.2 Any default relating to payment of interest / repayment of instalment in respect of any privately placed debt should also be reported to CIBIL by the investing FIs along with a copy of the offer document.

8. Disclosures

The FIs should disclose the details of the issuer composition of investments made through private placement and the non-performing investments in the ‘Notes on Accounts’ of the balance sheet, with effect from the year ending March 31, 2004 (June 30, 2004 in case of NHB) in the format furnished in the Appendix.

9. Trading and settlement in debt securities

As per the SEBI guidelines, all trades, with the exception of the spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange. In addition to complying with the SEBI guidelines, the FIs should ensure that all spot transactions in listed and unlisted debt securities are reported on the NDS and settled through the Clearing Corporation of India Limited (CCIL) from a date to be notified by RBI.

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APPENDIX

Format for disclosure in the "notes on accounts" in the Annual published reports

A. Issuer categories in respect of investments made

(As on the date of the balance sheet)

(Rs. in crore)

Sr. No.	Issuer	Amount	Amount of
			invest-ment made through private place-ment	‘below invest-ment grade’ Securities held	‘unrated’ Securities held	‘unlisted’ Securities
(1)	(2)	(3)	(4)	(5)	(6)	(7)
1	PSUs
2	FIs
3	Banks
4	Private corporates
5	Subsidiaries/ Joint ventures
6	Others
7	# Provision held towards depreciation		X X X	X X X	X X X	X X X
	Total *

# Only aggregate amount of provision held to be disclosed in column 3.

* NOTES:

1. Total under column 3 should tally with the total of investments included under the following categories in the balance sheet:

1. Shares

2. Debentures & Bonds
3. Subsidiaries/ joint ventures
4. Others

2. Amounts reported under columns 4, 5, 6 and 7 above may not be mutually exclusive.

B. Non performing investments

(Rs. Crore)

Particulars	Amount
Opening balance
Additions during the year since 1st April
Reductions during the above period
Closing balance
Total provisions held