Guidelines on Perpetual Debt Instruments

Guidelines on Perpetual Debt Instruments (PDI) for Inclusion in Tier 1 Capital

Non-deposit taking NBFCs can issue Perpetual Debt Instruments (PDI) as bonds or debentures. These can be part of Tier 1 or Tier 2 capital for capital adequacy. Here are the key terms and conditions:

Terms of Issue of PDI:

PDIs will be issued only in Indian Rupees.
The total amount raised should be within the limits of Tier 1 and Tier 2 capital. It can be raised in parts, but each investor must put in at least ₹5 lakh.
PDIs can count as Tier 1 capital up to 15% of the total Tier 1 capital. This is calculated based on the Tier 1 capital as of March 31 of the previous year, after removing goodwill and other intangible assets but before deducting investments. Any excess amount will count as Tier 2 capital.
PDIs have no maturity date – they are perpetual.
Interest can be fixed or floating, based on a market-determined benchmark.
PDIs should be plain vanilla instruments, but they can have a ‘call option’ after ten years, with the Reserve Bank’s approval.
There can be a one-time step-up option to increase the interest rate after ten years, but not more than 100 basis points above the initial rate.
A lock-in clause allows deferring interest payments if the CRAR is below the regulatory minimum or if payment would cause the CRAR to fall below this minimum. However, with the Reserve Bank’s approval, interest can be paid if it results in a net loss or increases the net loss, provided the CRAR stays above the norm.
Interest is not cumulative, except in specific cases.
Any use of the lock-in clause must be reported to the Reserve Bank’s Regional Office.

Seniority of Claim:

Investors in PDIs have higher claims than equity shareholders but are subordinate to all other creditors.

Discount:

PDIs are not subject to a progressive discount for capital adequacy as they are perpetual.

Other Conditions:

PDIs must be fully paid-up, unsecured, and free from restrictive clauses. They should comply with the Companies Act, 2013, and other relevant laws.
For investments by FIIs/NRIs in PDIs, NBFCs need the Reserve Bank’s approval on a case-by-case basis.
NBFCs issuing PDIs must comply with SEBI and other regulatory authorities’ terms and conditions.
Other NBFCs investing in PDIs will have their investments governed by the RBI Act, 1934. Investments over 10% of the owned fund will be deducted from the Owned Fund for Net Owned Fund calculation.

Reporting Requirements:

NBFCs issuing PDIs must report details of the debt raised and terms of issue to the Reserve Bank’s Regional Office.

Investment in PDIs by Other NBFCs:

Investments in PDIs by other NBFCs will attract risk weight as prescribed by the Reserve Bank.

Advances Against PDI:

NBFCs issuing PDIs cannot grant advances against these instruments.

Disclosure Requirements:

NBFCs must disclose in their Annual Report the amount raised through PDIs, the percentage of PDI to Tier 1 capital, and any years when interest on PDIs was not paid.
The Board of Directors must ensure clear disclosures to investors about the instrument type, associated risks, and its uninsured nature. The offer document should state that investment decisions are based on the investor’s analysis and the Reserve Bank does not guarantee repayment. The policy should also cover how the NBFC will manage additional interest costs if they choose to step up the rate. Compliance with all terms and conditions is mandatory.

Introduction to RBI – NBFC Scale Based Regulation

Regulations applicable for NBFC-BL

Regulations applicable for NBFC-ML

Regulatory Instructions for NBFC-UL

Directions for NBFC – Micro Finance MFIs

Specific Directions for NBFC-Factors and NBFC-ICCs

Specific Directions for Infrastructure Debt Funds IDFs-NBFC

Scoring Methodology for Identification of NBFC as NBFC-UL

Regulatory Guidance on Implementation of Ind AS by NBFCsv

Norms on Restructuring of Advances by NBFCs

Early Recognition of Financial Distress

Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries