by

Rajesh Goyal

What is Commercial Paper ? Define Commercial Paper ? or What is the meaning of Commercial Paper in India ?

Commercial 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 quality debt ratings.   Commercial 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:

1. (i) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore;
2. (ii) the company has been sanctioned working capital limit by bank/s or FIs; and
3. (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 ? :

1. 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.

(i) such conditions as may be set for them by Securities Exchange Board of India (SEBI) and

(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

Eligible 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.

Other Guidelines  for Issue of CPs :

a. CP 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.

b. Banks 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.

c. Non-bank entities (including corporates) may provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided:

1.   (i) the issuer fulfils the eligibility criteria prescribed for issuance of CP;
2.    (ii) the guarantor has a credit rating at least one notch higher than the issuer given by an approved CRA; and
3.    (iii) the 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.

d. The 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.

e. Banks and FIs shall have the flexibility to fix working capital limits, duly taking into account the resource pattern of company’s financing, including CP.

f. An 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.

g. The 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.

h. Every 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

1. CP 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.
2. Fresh investments by all RBI-regulated entities shall be only in dematerialised form.
3. CP shall be issued at a discount to face value as may be determined by the issuer.
4. No issuer shall have the issue of CP underwritten or co-accepted.
5. Options (call/put) are not permitted on CP.

What is the minimum and maximum period for which Commercial Paper can be issued?  In what denominations Commercial Paper can be issued?

1. CP 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.

1. CP 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 value).

Prcedure for Issuance of Commercial Papers :

1. Every issuer must appoint an IPA for issuance of CP.
2. The issuer should disclose to the potential investors, its latest financial position as per the standard market practice.
3. After 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.
4. The 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 order.

Procedure for Investment / Redemption :-

1. The investor in CP (primary subscriber) shall pay the discounted value of the CP to the account of the issuer through the IPA.
2. The investor holding the CP in physical form shall, on maturity, present the instrument for payment to the issuer through the IPA.
3. The holder of a CP in dematerialised form shall get the CP redeemed and receive payment through the IPA.

Documentation Procedures :-

1. 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.
2. Issuers /IPAs shall follow the operational guidelines issued by FIMMDA, from time to time, with the approval of RBI.

Trading and Settlement of CP

2. All OTC trades in CP shall be reported within 15 minutes of the trade to FIMMDA reporting platform.
3. OTC 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.
4. The settlement cycle for OTC trades in CP shall either be T+0 or T+1.

What is Procedure for Buyback of CP:

1. Issuers may buyback the CP, issued by them to the investors, before maturity.
2. Buyback of CP shall be through the secondary market and at prevailing market price.
3. The CP shall not be bought back before a minimum period of 7 days from the date of issue.
4. Issuer shall intimate the IPA of the buyback undertaken.
5. Buyback of CPs should be undertaken after taking approval from the Board of Directors.

What are the Duties and Obligations Of Issuers, IPA and CRA ? :

The duties and obligations of the Issuer, IPA and CRA are set out below:

I. Issuer

The issuer shall ensure that the guidelines and procedures laid down for the issuance of CP are strictly adhered to.

II. IPA

1. The 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.
2. The IPA shall certify that it has a valid agreement with the issuer (Schedule II).
3. The 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.
4. Certified copies of original documents, verified by the IPA, shall be held in the custody of IPA.
5. All 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.
6. IPAs, 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.
7. IPAs 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 these directions.

III. CRA

1. CRAs 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.
2. The 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.
3. The CRAs shall closely monitor the rating assigned to issuers vis-à-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)