What is Commercial Paper?
An unsecured money market instrument
In the form of a promissory note
Negotiable by endorsement and delivery
Introduced in India in 1990
To enable highly rated corporate
borrowers to diversify their sources of
short term borrowings
To provide an additional instrument to
investors
Guidelines for Issue of CP
Guidelines for issue of commercial paper (CP)
by companies, primary dealers and satellite
dealers are governed by the directions issued
by Reserve Bank of India.
Reviewed by an internal group
Who can issue a CP
Highly rated corporate borrowers
Primary dealers (PDs)
Satellite dealers (SDs)
All India financial institutions (FIs)
Eligibility of an Issuer
Tangible net worth of company not less than
Rs. 4 crore
The borrower account is classified as
standard asset by the financing bank/s
Minimum credit rating
CRISIL, ICRA, CARE, DCR
Min credit rating = P-2
Contd..
Maturity
CP can be issued for maturities
between a min of 15 days and max upto
one year from the date of issue
Denominations
min. amount Rs. 5 lacs
Denominations of Rs. 5 lacs or multiples
Contd..
Investment in CP
Individuals
Banking companies
Corporate bodies
NRIs & FIIs
Mode of Issuance
Either in the form of a promissory note or in a
demat form
At a discount to face value
Preference for demat form
Contd..
Limits and the Amount of Issue
Should not exceed the working capital
Within overall umbrella limit fixed by the RBI
Should not exceed 100% of its net owned
funds
Total amount of CP should be raised within a
period of two weeks
CP may be issued on a single date or in parts
Still shall have the same maturity date
Every issue should be treated as a fresh issue
Contd..
Procedure for Issuance for Corporate
Submit a proposal incorporating details as per
schedule II. A
Upto 50% of WCL, open the issue for subscription
In excess of 50% of WCL can open the issue for
subscription only after the proposal has been taken on
record by the financing banking company
Is complete within the period of two weeks
Issue physical certificates to the investor
Initial investor to pay the discounted value of CP to
the a/c of the issuing company
Contd..
Procedure for Issuance for PDs/SDs
Primary Dealer (PD) / Satellite Dealer (SD)
Should report details to RBI as per schedule
II. B
Make arrangements for privately placing the
issue
Ensure that issue is complete within a period
of two weeks
Initial investor shall pay discounted value of
the CP of the a/c of the issuing PD/SD
Advise the RBI the amount of CP actually
issued, within 3 days from the date of
completion of issue
Contd..
Procedure for Issuance for All-India FIs
Report details of the proposed issue to the
RBI (IECD) as per schedule II.C
Ensure that aggregate amount of CP issued is
within the overall umbrella limit fixed by RBI
Make arrangements for privately placing the
issue
Ensure that proposed issue is complete within
a period of 2 weeks
Initial investor to pay the discounted value of
the CP to the a/c of the issuing FI
Every FI issuing CP to advise the RBI (IECD)
the amount of CP issued, within 3 days
Contd..
Role and Responsibilities of Issuer
Guidelines & procedures laid down by the RBI
are strictly adhered to
Any violation of procedures /guidelines by
issuers of CP shall attract penal action
Debarring the concerned issuer from issuing
CP for next one year
Actions taken by the authorities would also be
made public
Contd..
Roles and Responsibilities of Financing
Banking Companies:
On receipt of the proposal for issuance
of CP by the corporate, would take the
proposal on record
Arrange for corresponding reduction in
the working capital fund based limit of
the issuer, once the CP is issued
In event of discrepancy / non-
compliance of guidelines/ procedures,
by the issuer, intimate the same to RBI
Contd..
Roles and Responsibilities of Issuing and
Paying Agent
Verify all the documents submitted by
the issuer and issue a certificate that
documents are in order (Schedule III)
Original documents verified should be
held in the custody of IPA
Other responsibility & standardized
Procedures/ documentation to be
examined by a SRO, to be identified by
the Reserve Bank
Violation to attract punitive action
Contd..
Roles and Responsibilities of Credit
Rating Agencies
Code of conduct prescribed by SEBI for CRAs
for undertaking rating of capital market
instruments shall be applicable for rating CP
Discretion to determine the validity period
At the time of rating to clearly indicate the date
when the rating is due for review
To closely monitor the rating assigned to
issuers vis--vis their track record at regular
intervals
Intimate the FBC (RBI in case of PD/SD and
FI) / IPA of any revision in the rating
