Banking Awareness: Commercial Paper

Dear Readers, in continuation of our
Banking Awareness Series, here we are presenting brief about “Commercial
Paper”.

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:-  i.
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.