Commercial Paper (CP): Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.
Introduced in India: Commercial Paper in India is a new addition to short-term instruments in Indian Money market since 1990 onward.
The introduction of Commercial paper as the short-term monetary instrument was the beginning of a reform in Indian Money market on the background of trend of Liberalization which began in the world economy during 1985 to 1990.
Purpose to introduce Commercial Paper:
It was introduced in India in 1990 with a view to enabling 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 for their operations.
Issuers of Commercial Paper:
The issuers of Commercial papers in Indian money market are broadly classified into:
i. Leasing and Finance Companies
ii. Manufacturing companies
iii. Financial Institutions
During the decade of 2000-01 to 2010-11, Leasing and finance companies had the average share of 70% of total issue of Commercial papers; while Manufacturing companies and Financial institutions had the average share of 15% each.
Whether all the corporate would automatically be eligible to issue CP?
No. A corporate 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.. company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and
iii. the borrowable account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.
Is there any rating requirement for issuance of CP? And if so, what is the rating requirement?
Yes. All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from:
i. Credit Rating Information Services of India Ltd. (CRISIL) or
ii. Investment Information and Credit Rating Agency of India Ltd. (ICRA) or
iii. Credit Analysis and Research Ltd. (CARE) or
iv. FITCH Ratings India Pvt. Ltd. or
v. Such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose.
NOTE:- 1. The minimum credit rating shall be A-2 [As per rating symbol and definition prescribed by Securities and Exchange Board of India (SEBI)].
2. The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review.
Minimum and maximum period of maturity prescribed for CP:
CP can be issued for maturities between a minimum of 7 days and a maximum of up to 1 year from the date of issue.
However, the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.
In what denominations a CP that can be issued:
CP can be issued in denominations of Rs.5 lakh or multiples thereof.
How long can the CP issue remain open?
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 can be issued on different dates by the same issuer:
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. Further, every issue of CP, including renewal, shall be treated as a fresh issue.
Who can act as Issuing and Paying Agent (IPA):
Only a scheduled bank can act as an IPA for issuance of CP.
Who can invest in CP:
Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs.
However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time.
CP can be held in Dematerialized (Demat) form:
CP can be issued either in the form of a promissory note (Schedule I given in the Master Circular-Guidelines for Issue of Commercial Paper dated July 1, 2011 and updated from time –to-time) or in a dematerialised form through any of the depositories approved by and registered with SEBI. Banks, FIs and PDs can hold CP only in dematerialised form.
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