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Final Guidelines on Investment by the FIs in Debt Securities


Financial Institutions Division

Department of Financial Supervision

January 8, 2004



RBI /2004/8

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

The CEOs of all-India Term Lending and Refinancing Institutions

Dear Sir,

Final guidelines on investment by the FIs in debt securities

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.




Copy of the SEBI Circular dated September 30, 2003


Deputy General Manager

Market Regulation Department – Policy

Tel : 22845355 Fax: 22845761


September 30, 2003

The Executive Directors/Managing Director/Administrators

Of All Stock Exchanges

Dear Sir/Madam,

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. The company shall make full disclosures (initial and continuing) in the manner prescribed in Schedule II of the Companies Act, 1956, SEBI (Disclosure and Investor Protection) Guidelines, 2000 and the Listing Agreement with the exchanges. However, if the privately placed debt securities are in standard denomination of Rs.10 Lakhs, such disclosures may be made only through web sites of the stock exchange where the debt securities are sought to be listed.

1.2. The debt securities shall carry a credit rating of not less than investment grade from a Credit Rating Agency registered with the Board.

1.3. The company shall appoint a debenture trustee registered with SEBI in respect of the issue of the debt securities.

1.4. The debt securities shall be issued and traded in demat form.

1.5. The company shall sign a separate listing agreement with the exchange in respect of debt securities and comply with the conditions of listing.

1.6. All trades with the exception of spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange.

1.7. The trading in privately placed debts shall only take place between Qualified Institutional Investors (QIBs) and High Networth Individuals (HNIs), in standard denomination of Rs.10 lakhs.

1.8. The requirement of Rule 19(2)(b) of the Securities Contract (Regulation) Rules, 1957 will not be applicable to listing of privately placed debt securities on exchanges, provided all the above requirements are complied with.

1.9. If the intermediaries registered with SEBI associate themselves with the issuance of private placement of unlisted debt securities, they will be held accountable for such issues. They will also be required to furnish periodical reports to SEBI in such format as may be decided by SEBI.

2. The stock exchanges are directed to:

2.1 make necessary amendments to the listing agreement, bye-laws, rules and regulations for the implementation of the above decision immediately, as may be applicable.

2.2 bring the provisions of this circular to the notice of the listed companies/member brokers/clearing members of the Exchange and also to disseminate the same on the website for easy access to the investors; and

2.3 communicate to SEBI, the status of the implementation of the provisions of this circular in Section II, item no. 13 of the Monthly Development Report for the month of October 2003.

3. This circular is being issued in exercise of powers conferred by section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with section 10 of the Securities Contracts (Regulation) Act 1956, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.


Yours faithfully,





Guidelines on Investments by the select All-India FIs

In Non-Government Debt Securities

1. Coverage

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

2. Effective date and transition time

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:

    1. Investment in units of mutual fund schemes where the entire corpus is invested in non-government debt securities would be outside the purview of the above guidelines till December 31, 2004; thereafter, such investments would also attract these guidelines.
    2. With effect from January 1, 2005, investment in units of such schemes of mutual fund as have an exposure to unlisted debt securities of less than 10 per cent of the corpus of the scheme would be treated on par with listed securities for the purpose of the prudential limits prescribed at para 6 below. Thus, till December 31, 2004, investments in such units would attract the prudential limits.
    3. The FIs may invest until March 31, 2004 in the existing unlisted securities, which were issued on or before November 30, 2003. In case, the issuers have applied to the stock exchange(s) for listing of such unlisted securities and the security is rated as minimum investment grade, the FIs may continue to invest in such unlisted securities even after March 31, 2004 but only until December 31, 2004.
    4. As regards the unlisted securities issued after November 30, 2003, the FIs may invest, till December 31, 2004, up to 10 per cent of the incremental investments in the categories covered under these guidelines over the corresponding figure of outstanding investments as on November 30, 2003.
    5. With effect from January 1, 2005 only those FIs would be eligible to make fresh investments (up to the prescribed prudential limits) in the unlisted securities covered in these guidelines whose investments in such securities are within the prudential limits prescribed.

3. Definitions

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:

  1. The credit rating letter relied upon is not more than one month old on the date of opening of the issue, and
  2. The rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and
  3. The rating letter and the rating rationale are a part of the offer document.
  4. In the case of secondary market acquisition, the credit rating of the issue should be in force and confirmed from the monthly bulletin published by the respective rating agency.

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:

i) In respect of fixed / predetermined income securities, interest / principal / fixed dividend on preference shares (including maturity proceeds) is due and remains unpaid for more than 180 days.

    1. The equity shares of a company have been valued at Re. 1/- per company, on account of the non-availability of the latest balance sheet (as per the instructions contained in para 26 of the Annexure to circular DBS.FID. No.C-9/01.02.00/ 2000-01 dated November 9, 2000)
    2. If any credit facility availed by the issuer of the security is classified as NPA in the books of the FI, investment in any of the securities issued by the same issuer would also be treated as NPI.

4 Regulatory requirements

4.1 The FIs must not invest in unrated debt securities but only in rated ones, which carry a minimum investment grade rating from a credit rating agency registered with SEBI.

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.

4.3 The FIs should not invest in debt securities of original maturity of less than one-year other than Commercial Paper and Certificates of Deposits, which are covered under the RBI guidelines.

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.

5. Internal assessments

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.

6. Prudential limits

    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. Role of the Boards of Directors

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. Reporting requirements

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.

10. Trading and settlement in debt securities

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.




Format for disclosure in the "Notes on Accounts" in the

annual published reports

A. Issuer categories in respect of investments made

(As on the date of the balance sheet)

(Rs. in crore)

Sr. No.




















Amount of

invest-ment made through private place-ment

‘below invest-ment grade’

Securities held


Securities held





















Private corporates



Subsidiaries/ Joint ventures






# Provision held towards depreciation







Total *


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


1. Total under column 3 should tally with the total of investments included under the following categories in the balance sheet:

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

2. Amounts reported under columns 4, 5, 6 and 7 above might not be mutually exclusive.

  1. Non performing investments

(Rs. Crore)



Opening balance


Additions during the year since 1st April


Reductions during the above period


Closing balance


Total provisions held