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| RBI, Sebi to regulate NCDs jointly |
| Anindita Dey / Mumbai Sep 25, 2009, 00:17 IST |
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Debenture trustees may have to report company filings to the market regulator.
Non-convertible debentures (NCDs) of less than one-year maturity will now be regulated jointly by financial and market regulators. The decision was taken at a meeting between the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) earlier this week.
At the meeting, the two regulators agreed that NCDs needed to be regulated following huge investments by mutual funds in fixed income plans and banks as it posed a systemic risk in case there was any problem in redemption of these instruments.
Following this decision, debenture trustees to such instruments may be asked to report the filings by companies or non-banking finance companies (NBFCs) to Sebi which, in turn, will send them to RBI.
Before floating NCDs, every company appoints a debenture trustee, which is usually a bank or a broking firm, that acts as a custodian of the debentures.
NCDs are debt instruments floated by companies, NBFCs and banks to raise short-term finance from the market, mostly for working capital purposes. These are subscribed to in a major way by mutual funds for their short-term fixed-income portfolios, and other banks. However, NCDs are neither listed, nor reported to any regulator and thus are totally unregulated as of now.
According to sources, these instruments are privately-placed with institutional investors such as mutual funds and banks. Therefore, any data on the total mount outstanding in NCDs at a given point of time are difficult to get.
Data on NCDs are required to avoid last October-like situations that compelled RBI to provide liquidity support to both banks and mutual funds. Back then the mutual funds faced the redemption pressure, and companies rolled over the maturity of NCDs to avoid default as they found it difficult to pay the money back to debenture holders.
On the other hand, the money borrowed through NCDs belongs to the mutual funds or banks that raise it from the public. Thus, any default in such instruments has a major systemic risk.
In October 2008, liquidity support worth Rs 20,000 crore was given to the mutual funds to manage redemption pressure following defaults and eventual rollback of NCDs. Even the banks were allowed to lend against and on buyback of certificates of deposit (CDs) held by mutual funds to tide over the redemption pressure.
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