RBI issues directives on how NRIs should invest in NCDs

• This landmark announcement, part of the RBI’s master direction, released on January 3, 2023.

• It brings clarity and guidelines for NRIs seeking to invest in NCDs

PRAVASISAMWAD.COM

The Reserve Bank of India (RBI) has recently issued comprehensive directives for Non-Convertible Debentures (NCDs) investments by Non-Resident Indians (NRIs), in accordance with the provisions outlined in the Foreign Exchange Management Act (FEMA), 1999. This landmark announcement, part of the RBI’s master direction released on January 3, 2023, brings clarity and guidelines for NRIs seeking to invest in NCDs.

The RBI’s directives specifically pertain to NCDs and Commercial Papers (CPs) with an original or initial maturity of up to one year. While commercial papers are unsecured instruments issued by companies, NCDs provide a secured investment avenue. This makes NCDs an attractive option for senior citizens and risk-averse individuals who prioritize stable returns in their investment portfolios, provided their risk appetite aligns.

NRIs considering NCD investments are advised to thoroughly understand and adhere to these guidelines for a secure and compliant investment experience

In line with the RBI’s guidelines, these financial instruments will be issued in dematerialized form, and the minimum investment threshold has been set at Rs 5 lakh, with subsequent increments in multiples of Rs 5 lakh. Notably, the tenure for NCDs is mandated to be no less than 90 days and no more than one year. Importantly, these instruments will not be issued with the call/put option.

Further elaborating on the guidelines, the RBI stipulates that NCDs can be issued at a discount or at a fixed or floating coupon rate. The minimum credit rating required for the issuance of NCDs is set at ‘A3’. Additionally, the settlement period for payment to the issuer and the issuance of NCDs to the investor is fixed at T+4 (the date of trade plus four working days).

To enhance transparency, issuers are mandated to disclose the purpose of utilizing the raised funds in their offer documents. These directives are slated to come into effect from April 1, 2024, as per the circular issued by the RBI. NRIs considering NCD investments are advised to thoroughly understand and adhere to these guidelines for a secure and compliant investment experience.

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