The RBI’s recent notification dated January 29, 2025 on Private Placement of Non-Convertible Debentures (NCDs) with Maturity Period of more than One (1) Year by HFCs, has repealed the existing guidelines under Chapter XI of the Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021. Instead, the guidelines applicable to NBFCs under para 58 of the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 shall now apply to HFCs, effective immediately for all fresh private placements of NCDs.

This move signifies a shift towards regulatory harmonization, with the intent of creating a uniform debt issuance framework across NBFCs and HFCs.  Some of the key implications of the harmonization are discussed below:

Implications of the New Guidelines

1. Regulatory Alignment and Simplification

By aligning HFCs with NBFCs for NCD issuance, regulatory oversight becomes more streamlined. This will reduce operational complexities for financial conglomerates that operate both HFC and NBFC subsidiaries, leading to simplified compliance and reporting requirements.

2. Impact on Borrowing Costs

HFCs previously faced stringent regulations on NCD issuance, including higher security cover requirements and mandatory debenture trustee appointments. With NBFC guidelines now applicable, some of these restrictions may be relaxed, potentially lowering borrowing costs. However, this could also lead to increased risk perception among investors, potentially leading to higher risk premiums on HFC-issued debt instruments.

3. Investor Confidence and Risk Exposure

Under the previous HFC guidelines, all NCDs had to be rated by any one credit rating agency and HFC should have a minimum credit rating of a moderate degree of safety whereas NBFC norms do not require financial institutions to carry out credit rating before raising funds through NCDs. This change may increase investor concerns regarding credit risk in HFC-issued debt instruments. Consequently, HFCs may face higher due diligence scrutiny from investors.

4. Streamlining Procedural Compliances for issuance of NCDs
• The limit of raising funds via NCDs can now be fixed by the Board of Directors or its shareholders instead of lower limits as used to be fixed by Rating Agency.  
• Now there is no limit in issuance of offer documents to investors which used to be six (6) months from the date of passing board resolution.
• NBFC norms do not fix any timeline to keep the subscription open to subscribe NCDs which used to be a maximum of 30 days from the date of opening for subscription in terms of HFC Guidelines.
• An auditor’s certificate certifying compliance with the guidelines is now no longer required.

The revised guidelines align HFCs’ NCD issuance framework with the provisions of the Companies Act, 2013, ensuring continued compliance with statutory requirements related to offer documents, shareholder approvals, and disclosures. For listed HFCs, the SEBI (Non-Convertible Securities) Regulations will remain applicable, governing disclosure and issuance norms.

Additionally, for HFCs raising funds through NCDs with a maturity of up to one year, the regulatory framework under the Master Direction on Commercial Paper and Non-Convertible Debentures, 2024 shall continue to apply, ensuring consistency in short-term debt market operations.

Conclusion

While aligning HFCs with NBFC guidelines for NCD issuance brings regulatory uniformity and reduces borrowing costs, it also introduces higher investor risk and may impact financial stability in the housing finance sector. A balanced approach, where key investor protections are retained while allowing flexibility in fund-raising, would be essential to maintaining confidence and ensuring sectoral stability.

With this regulatory shift, HFCs must reassess their capital-raising strategies, ensure robust risk management practices, and proactively engage with investors to navigate the changing debt market landscape.