What is Commercial Paper ? Define Commercial Paper ? or What is the meaning of
Commercial Paper in India ?
Paper (CP) is an "unsecured
money market instrument
issued in the form of a promissory note". These are not usually backed by any
form of collaterals and is allowed to be issued only by corporate with high
Paper were introduced in India in 1990 with a view to enable high rated
corporate borrowers to raise short term borrowers by this additional type of
instrument which was till that at time was not available in India.
Who are Eligible to Issue Commercial Paper (CP) in India ? :
Companies, PDs and FIs are permitted to raise short term resources through CP.
A company would be eligible to issue CP provided:
(i) the tangible net worth of the company, as per the latest audited balance
sheet, is not less than Rs.4 crore;
(ii) the company has been sanctioned working capital limit by bank/s or FIs;
(iii) the borrowal account of the company is classified as a Standard Asset
by the financing bank/institution.
Who Are Eligible To Invest in CP ? :
Individuals, banks, other corporate bodies (registered or incorporated in
India) and unincorporated bodies, Non-Resident Indians and Foreign
Institutional Investors (FIIs) shall be eligible to invest in CP.
FIIs shall be eligible to invest in CPs subject to
(i) such conditions as may be set for them by Securities Exchange Board of India
(ii) compliance with the provisions of the Foreign Exchange Management Act,
1999, the Foreign Exchange (Deposit) Regulations, 2000 and the Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2000, as amended from time to time
What are the
participants/issuers shall obtain credit rating for issuance of CP from any one
of the SEBI registered CRAs. The minimum credit rating shall be ‘A3’ as per
rating symbol and definition prescribed by SEBI. The issuers shall ensure at the
time of issuance of the CP that the rating so obtained is current and has not
fallen due for review.
Guidelines for Issue of CPs :
shall be issued as a ‘stand alone’ product. Further, it would not be obligatory
in any manner on the part of the banks and FIs to provide stand-by facility to
the issuers of CP.
and FIs may, based on their commercial judgement, subject to the prudential
norms as applicable to them, with the specific approval of their respective
Boards, choose to provide stand-by assistance/credit, back-stop facility etc. by
way of credit enhancement for a CP issue.
Non-bank entities (including corporates) may provide unconditional and
irrevocable guarantee for credit enhancement for CP issue provided:
issuer fulfils the eligibility criteria prescribed for issuance of CP;
guarantor has a credit rating at least one notch higher than the issuer
given by an approved CRA; and
offer document for CP properly discloses the net worth of the guarantor
company, the names of the companies to which the guarantor has issued
similar guarantees, the extent of the guarantees offered by the guarantor
company, and the conditions under which the guarantee will be invoked.
aggregate amount of CP that can be issued by an issuer shall at all times be
within the limit as approved by its Board of Directors or the quantum indicated
by the CRA for the specified rating, whichever is lower.
and FIs shall have the flexibility to fix working capital limits, duly taking
into account the resource pattern of company’s financing, including CP.
issue of CP by an FI shall be within the overall umbrella limit prescribed in
the Master Circular on Resource Raising Norms for FIs, issued by the Reserve
Bank of India, Department of Banking Operations and Development, as prescribed/
updated from time-to-time.
total amount of CP proposed to be issued should be raised within a period of two
weeks from the date on which the issuer opens the issue for subscription. CP may
be issued on a single date or in parts on different dates provided that in the
latter case, each CP shall have the same maturity date.
issue of CP, and every renewal of a CP, shall be treated as a fresh issue.
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Form and Mode of Issuance of Commercial Papers
shall be issued in the form of a promissory note (as specified in these
Directions) and held in physical form or in a dematerialized form through
any of the depositories approved by and registered with SEBI, provided that
all RBI regulated entities can deal in and hold CP only in dematerialised
form through such depositories.
investments by all RBI-regulated entities shall be only in dematerialised
shall be issued at a discount to face value as may be determined by the
issuer shall have the issue of CP underwritten or co-accepted.
Options (call/put) are not permitted on CP.
the minimum and
Paper can be
Paper can be
shall be issued for maturities between a minimum of 7 days and a maximum of
up to one year from the date of issue. The
maturity date of the CP shall not go beyond the date up to which the credit
rating of the issuer is valid.
shall be issued in denominations of Rs 5 lakh and multiples thereof. The
amount invested by a single investor should not be less than Rs.5 lakh (face
Prcedure for Issuance of Commercial Papers :
issuer must appoint an IPA for issuance of CP.
issuer should disclose to the potential investors, its latest financial
position as per the standard market practice.
the exchange of confirmation of the deal between the investor and the
issuer, the issuer shall arrange for crediting the CP to the Demat account
of the investor with the depository through the IPA.
issuer shall give to the investor a copy of IPA certificate to the effect
that the issuer has a valid agreement with the IPA and documents are in
Investment / Redemption :-
investor in CP (primary subscriber) shall pay the discounted value of the CP
to the account of the issuer through the IPA.
investor holding the CP in physical form shall, on maturity, present the
instrument for payment to the issuer through the IPA.
holder of a CP in dematerialised form shall get the CP redeemed and receive
payment through the IPA.
Documentation Procedures :-
Standardised procedures and documentation for CPs are prescribed in
consultation with Fixed Income Money Market and Derivatives Association of
India (FIMMDA) in consonance with international best practices.
Issuers /IPAs shall follow the operational guidelines issued by FIMMDA, from
time to time, with the approval of RBI.
and Settlement of CP
OTC trades in CP shall be reported within 15 minutes of the trade to FIMMDA
trades in CP shall be settled through the clearing house of the National
Stock Exchange (NSE), i.e., the National Securities Clearing Corporation
Limited (NSCCL) and the clearing house of the Bombay Stock Exchange (BSE),
i.e., Indian Clearing Corporation Limited (ICCL), as per the norms specified
by NSCCL and ICCL from time to time.
settlement cycle for OTC trades in CP shall either be T+0 or T+1.
What is Procedure for Buyback
Issuers may buyback the CP, issued by them to the investors, before
Buyback of CP shall be through the secondary market and at prevailing market
shall not be bought back before a minimum period of 7 days from the date of
shall intimate the IPA of the buyback undertaken.
Buyback of CPs should be undertaken after taking approval from the Board of
What are the Duties
and Obligations Of Issuers, IPA and CRA ? :
and obligations of the Issuer, IPA and CRA are set out below:
shall ensure that the guidelines and procedures laid down for the issuance of CP
are strictly adhered to.
IPA shall ensure that the issuer has the minimum credit rating as stipulated
by RBI and the amount mobilised through issuance of CP is within the quantum
indicated by CRA for the specified rating or as approved by its Board of
Directors, whichever is lower.
IPA shall certify that it has a valid agreement with the issuer (Schedule
IPA shall verify that all the documents submitted by the issuer, viz., copy
of board resolution, signatures of authorised executants (when CP is issued
in physical form) are in order and shall issue a certificate to this effect.
Certified copies of original documents, verified by the IPA, shall be held
in the custody of IPA.
scheduled banks, acting as IPAs, shall report the details of issuance of CP
on the Online Returns Filing System (ORFS) module of the RBI within two days
from the date of issuance of the CP.
shall immediately report, on occurrence, full particulars of defaults in
repayment of CP to the Chief General Manager, Financial Markets Department,
Reserve Bank of India, Central Office, Fort, Mumbai-400001 in the format as
given in these directions.
shall also report all instances of buyback of CPs undertaken by the issuer
to the Chief General Manager, Financial Markets Department, Reserve Bank of
India, Central Office, Fort, Mumbai–400001 in the format as given in of
shall abide by the Code of Conduct prescribed by the SEBI for CRAs for
undertaking rating of capital market instruments, which shall be applicable
for rating CPs.
CRAs shall have the discretion to determine the validity period of the
rating depending upon their perception about the strength of the issuer; and
they shall, at the time of rating, clearly indicate the date when the rating
is due for review.
CRAs shall closely monitor the rating assigned to issuers vis-ŕ-vis their
track record at regular intervals and shall make their revision in the
ratings public through their publications and website.
(Last updated 23rd March, 2013)
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