January 8, 2004

RBI /2004/8

DBS.FID.No. C-11 /01.02.00/2003-04

Dear Sir,

Please refer to our Circular DBS.FID.No.C-8/01.02.00/2003-04 dated November 4, 2003 forwarding the draft guidelines on investment by the FIs in debt securities for comments which were issued pursuant to the Circular No. SEBI/MRD/SE/AT/36/ 2003/30/9 dated September 30, 2003 issued by SEBI (copy enclosed at Annex 1). SEBI has prescribed the guidelines to be complied with by the listed companies issuing debt securities through private placement.

2. In the light of the comments since received from the FIs, the guidelines have been finalised and are furnished at Annex – 2. The guidelines seek to address the risks arising from investment in non-government debt securities, particularly through private placement and would come into force with effect from April 1, 2004. Necessary action may please, therefore, be initiated to ensure compliance with the guidelines by that date.

3. Please acknowledge receipt.

Yours faithfully,

(S. S. Gangopadhyay)

Chief General Manager

Encls.: As above.

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

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 These guidelines apply to the FIs’ investments in debt instruments, both in the primary market (public issue as also private placement) as well as the secondary market, in the following categories:

1. debt instruments issued by companies, banks, FIs and State and Central Government sponsored institutions, SPVs, etc.;
2. debt instruments/ bond issued by Central or State Public Sector Undertakings, with or without government guarantee;
3. units of debt-oriented schemes of Mutual Funds i.e., the schemes whose major part the corpus is invested in debt securities;
4. Capital gains bonds and the bonds eligible for priority sector status;

1.2 The guidelines, however, do not apply to the following categories of investments of the FIs:

1. government securities and the units of Gilt Funds;
2. securities which are in the nature of advance under the extant prudential norms of RBI;
3. units of the equity oriented schemes of Mutual Funds, viz., the schemes wherein a major part of their corpus is invested in equity shares;
4. units of the "Balanced Funds", which invest in debt as well as equities, provided a major part of the corpus is invested in equity shares. In case of predominance of investments in debt securities by the Fund, these guidelines would be attracted.
5. Units of venture capital funds and the money market mutual funds;
6. Commercial Paper; and
7. Certificates of Deposits

While these guidelines would come into force with effect from April 1, 2004, considering the time required by the issuers of debt securities to get their existing unlisted debt issues listed on the stock exchanges, the following transition time is being provided:

3.1 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:

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

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

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

4.2 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.

4.4 The FIs should undertake usual due diligence in respect of investments in debt securities including the securities which do not attract these guidelines.

4.5 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.

4.6 The unlisted debt securities in which the FIs may invest up to the limits specified in paragraph 6 below, should be rated and disclosure requirements as prescribed by the SEBI for listed companies should be followed by the issuer company.

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.

1. The total investment in the unlisted debt securities should not exceed 10 per cent of the FIs’ total investment in debt securities, which fall within the ambit of these guidelines, as on March 31(June 30 in case of NHB), of the previous year. However, the investment in the following instruments will not be reckoned as 'unlisted debt securities' for monitoring compliance with the above prudential limits:

1. Security Receipts (SRs) issued by Securitisation Companies / Reconstruction Companies registered with RBI in terms of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002; and
2. Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) which are rated at or above the minimum investment grade.

6.2 The FIs which have exposure to investments in debt securities in excess of the prudential limit prescribed at para 6.1 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.

6.3 As a matter of prudence, the FIs should stipulate, with the approval of the Board, minimum ratings / quality standards and industry-wise, maturity-wise, duration-wise, issuer-wise, etc., exposure limits, for acquiring exposure in debt securities, which fall within the ambit of these guidelines, to address the concentration risk and the risk of illiquidity.

7.1 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.

7.2 The Board should put in place a monitoring system to ensure that the prudential limits prescribed in paragraphs 6 above are scrupulously complied with, including the system for addressing the breaches, if any, due to rating migration.

7.3 Boards of the FIs should review, twice a year, the following aspects of investment in debt securities covered by these guidelines:

1. Total turnover (investment and divestment) during the reporting period;
2. Compliance with the RBI-mandated prudential limits as also those 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.

8.1 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.

8.2 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.

8.3 The FIs should also report to the RBI such particulars in respect of their investments in unlisted securities as may be prescribed by RBI from time to time.

9. 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.

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.

*********

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

* NOTES:

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