NBFCs allowed to issue perpetual debt papers

Non-deposit-taking non-banking finance companies (NBFCs), with an asset size of Rs 100 crore and above, can now increase their capital funds by issuing perpetual debt instruments (PDIs).

According to a circular issued by the Reserve Bank of India (RBI) on Wednesday, such PDIs will be eligible for inclusion in tier-I capital to the extent of 15 per cent of their total tier-I capital at the end of March 31 of the previous accounting year. The amount of PDI that is in excess of the permissible tier-I capital will qualify as tier-II capital.

“Taking into consideration the need for enhanced funds for increasing business and meeting regulatory requirements, it has been decided that systemically important non-deposit-taking NBFCs may augment their capital funds by issue of perpetual debt instruments,” RBI said.

Earlier, RBI had allowed banks to issue perpetual debt instruments to help them raise funds to meet their additional capital needs. In case of systemically important non-deposit-taking NBFCs, the regulator had raised the Capital Adequacy Ratio (CAR) from 10 per cent at present to 12 per cent by the end of March 2009 and 15 per cent by March 31, 2010.

The finance companies were of the opinion that raising funds from the market, especially in these times, to meet the capital requirements may be difficult. The new instrument is expected to make their task a little simpler.

These NBFCs have been allowed to issue PDIs in the form of bonds and debentures and the money may be raised in tranches. However, the minimum investment by a single investor in each such tranche should not be less than Rs 5 lakh, the regulator said.

The interest payable to the investors can be either at a fixed rate or at a floating rate relating to a market-determined rupee interest benchmark rate.

Though NBFCs will be allowed to issue PDIs only as plain-vanilla instruments, they can also issue these instruments with a call option, but they will be subject to “strict compliance”.

The instrument will be subjected to a lock-in clause, in terms of which the issuing NBFC may defer the payment of interest, if its CAR falls below the RBI prescription. Even if such payments result in a reduction in the CAR falling below the requirement, interest payment will have to be deferred.

The finance companies will be required to make full disclosure of the amount of funds raised through PDIs in their annual report and also mention the financial year in which interest on the instrument has not been paid.