Unlisted NCDs may be treated as term loans, carry RBI moratorium benefit

Sources say Sebi has taken up the matter after several corporate houses reached out seeking relief as some raised significant amount of money through NCDs.
India Inc is likely to get further relief on the loan repayment front, particularly with regard to unlisted debentures.

Sources say the Securities and Exchange Board of India (Sebi) is likely to allow corporate houses to treat unlisted non-convertible debentures (NCDs) as ‘term loans’.

This will allow the three-month moratorium announced by the Reserve Bank of India (RBI) to be applied on these instruments.

According to the sources, Sebi has initiated talks with RBI on this issue of including both secured and unsecured NCDs under moratorium.

“The regulator has received certain inputs in this regard and is in touch with regulators concerned and Ministry of Corporate Affairs for a viable outcome,” an official said.

Sources say Sebi has taken up the matter after several corporate houses reached out seeking relief as some raised significant amount of money through NCDs.

“Unquoted/unlisted debentures shall be treated as term loans or other types of credit facilities depending upon the tenure of such NCDs for the purpose of income recognition and asset classification,” said an executive of one of these companies, adding that some NCDs have been subscribed by banks and non-banking finance companies (NBFCs) and are unlisted.
These firms are learnt to have cited RBI’s 2017 circular that defines term loan, which are repayable after a specified time period. However, despite this they are unable to avail of the facilities in absence of clarity, he said.

On March 27, RBI had said lending institutions, including banks, NBFCs, housing finance companies, would be permitted to allow a moratorium of three months on payment of instalments of all term loans outstanding as on March 1.

The regulator clarified this would include all loans including agriculture term loans, and was intended to cover principal and interest component.

In 2019, large numbers of NCD issuances happened mostly because of banks and mutual funds dried up after a series of liquidity crises. Many NBFCs opted for public issuance of bonds to meet the regulatory requirement that large firms need to raise 25 per cent of borrowing through bonds.

According to Prime Database, firms raised approximately Rs 64,405 crore in 2019-20 through unlisted  corporate bond and non-convertible debentures. While about Rs 5.93 trillion worth of public issuances of NCDs were made over the period (GFX attached).

Legally, the unlisted NCD contracts are between the bond holders, debt holders and issuers, which are beyond the purview of regulators, an expert said.
“In a given scenario, the regulator may perhaps step in and come up with a proper guidelines involving certain amount of guarantee, interest return and so on to be provided by issuer to roll over the unlisted NCDs for a certain period. Clarity on the classification of such assets class would certainly reduce the risk of default,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory.

From the systemic risk point of view too, such measures is in the interest of both retail investors and institutional investors and the issuer as well.Meanwhile, companies raised NCDs should also come out with some plans and timelines to allow redemptions to their investors once the present Covid threats withdraw, Parekh added.

NCDs are loan-linked bonds (that cannot be converted into stocks) and usually offer higher interest rates than convertible debentures, bank fixed deposits and corporate deposits.

On maturity, the principal amount along with accumulated interest is paid to the holder of the instrument. Corporate houses typically raise money through this route to fund expansion plans, retiring debt, supporting working capital requirements and other general purposes.


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