Introduction

Commercial Paper is an unsecured money market instrument issued in the form of a promissory note. In order to develop the money market, CP, as a privately placed instrument, was introduced in India in 1990 with a view to enable highly rated corporate borrowers to diversify their sources of short term borrowings and to provide an additional instrument to investors. Subsequently Primary Dealers and all India Financial Institutions were also permitted to issue CP to enable them to meet their short term funding requirements.

Eligibility of getting Commercial Paper

Companies, primary dealers (PDs) and the all India financial institutions are permitted to raise short term resources through CP. A company will be eligible to issue Commercial Paper if the following three conditions are fulfilled:

• The tangible net worth of the company as per the latest audited Balance-sheet, is not less than 4 crores;
• The company has been sanctioned working capital limit by banks or FIs;
• The borrowal account of the company is classified as a Standard asset by the financing bank or institution.

Credit Rating

Before issuing Commercial Paper, all eligible participants or issuers must obtain the credit rating for issuance of Commercial Paper from any one of the SEBI registered Credit rating agencies. The minimum credit rating should 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.

Tenor and Denomination

Commercial Paper should 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 Commercial Paper should not go beyond the date up to which the credit rating of the issuer is valid. Commercial Paper shall be issued in denominations of Rs. 5 lakhs and multiples thereof. The amount invested by a single investor should not be less than Rs. 5 lakh (face value). CP should be issued at a discount to face value as may be determined by the issuer. No issuer should have the issuance of CP underwritten or co-accepted. Options (call or put) are not permitted on Commercial Paper.

Limits and Amount

The aggregate amount of Commercial Paper should be within the overall limit approved by the Board of Directors or the quantum indicated by the credit rating agency for the specified rating, whichever is lower. Banks and FIs can have flexibility to fix working capital limits duly taking into account the resource pattern of companies financing including CPs. FIs can issue CPs within the overall umbrella limit prescribed in the Master circular or Direction on resource Raising norms for FIs, issued by the Department of Banking Regulation, Reserve Bank of India, as prescribed or updated from time to time.

The total amount of CPs 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. CPs can be issued on a single date or in parts on different dates provided they have the same maturity date. Every issue of CP, and every removal of a CP, will be treated as a fresh issue.

Stand-by-facility

CPs can be issued as a ‘stand-alone’  product and therefor it would not be obligatory in any manner on the part of banks and FIs to provide stand-by facility to the issuers of CP. Banks and FIs have the flexibility to provide for a CP issue, credit enhancement by way of stand-by assistance or credit, back-stop facility etc. based on their commercial judgment, subject to prudential norms as applicable and with specific approval of their books.

Credit enhancement limits

Non-bank entities including corporates may also provide unconditional and irrevocable gurantee for credit enhancement for CP issue provided.

• The issuer fulfills the eligibility criteria prescribed for issuance of CP.
• The guarantor has a credit rating at least one notch higher than the issuer given by the approved credit rating agency; and
• The offer document for Commercial Paper 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.

Investment in Commercial Paper

CPs may be issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-resident Indians (NRIs) and also Foreign Institutional investors (FIIs). Investment by FIIs in CPs should be subject to such conditions as may be set for them by Securities Exchange Board of India (SEBI) and 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.

Mode and Procedure for issuance

Commercial Papers can be issued in the form of a promissory note as specified in Annex 3 to those directions and held in physical form or in a dematerialized from 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 dematerialized form through such depositors. Fresh investments by all RBI regulated entities should be only in dematerialized form.

Appointment of issuing and paying Agent (IPA)

For issue of CPs every issuer must appoint an IPA. The issuer should disclose to the potential investors, it’s latest financial position as per the standard market practice. After the exchange of confirmation of the deal between the investor and the issuer, the issuer should arrange for crediting the CP to the Demat account of the investor with the depository through the IPA. 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. IPA means a Scheduled Bank acting as an IPA.

Dematerialized Form

Although both the issuers and the subscribers have the options to issue or hold CPs in dematerialized or physical form, they are encouraged to prefer exclusive reliance on dematerialized form of issue or holding. Banks, FIs, PDs and SDs should invest and hold Commercial Papers only in dematerialized form.

Documentation procedure

Standardized procedures and documentation for CPs are prescribed in consultation with Fixed income money market and Derivatives Association of India in consonance with international best practices. Issuers or IPAs should follow the operational guidelines issued by FIMMDA, from time to time, with the approval of RBI.

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