The Reserve Bank of India has issued final guidelines for investment by financial institutions in non-government debt securities with a ceiling of 10 per cent of financial institutions' total investment in debt securities, which are governed by these norms, as on March 31 of previous year.

While these guidelines would come into force on April 1, 2004, the FIs had been given a transition period to comply with the norms, considering the time required by the issuers of debt securities to get their existing unlisted debt issues listed on the stock exchanges, an RBI notification said.

The FIs must invest only in rated debt securities, which carry a minimum investment grade rating from a rating agencies.

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 were covered under the RBI guidelines.

These norms would apply to debt instruments issued by companies, banks, FIs and state and central government-sponsored institutions, special purpose vehicles, debt instruments/bond issued by central or state public sector undertakings, with or without government guarantee; units of debt-oriented schemes of mutual funds; capital gains bonds and the bonds eligible for priority sector status.

Referring to the transition period, RBI said 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.

The RBI said that with effect from January 1, 2005, investment in mutual fund schemes, which had an exposure to unlisted debt securities of less than 10 per cent of the corpus, would be treated on par with listed securities for the purpose of the prudential limits.

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 for listing of unlisted securities, which had a minimum investment grade, the FIs may continue to invest in such papers even after March 31, 2004 but only until December 31, 2004.

Effective January 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 were in compliance with the norms.

On regulatory requirements, the FIs should undertake usual due diligence in respect of investments in debt securities including those which do not attract these norms.

Referring to the prudential norms, it said the FI board should put in place a monitoring system to ensure that the prudential limits were complied with, including the system for addressing the breaches, if any, due to rating migration.

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. Any default relating to payment for private debt should also be reported to CIBIL, it added.