COMMERCIAL PAPER &

CERTIFICATE
OF DEPOSITS
 Commercial paper (CP) is a short-term instrument, introduced in 1990, to
enable non-banking companies to borrow short-term funds through liquid
money market instruments.

 CPs were intended to be part of the working capital finance for corporates, and
were therefore part of the working capital limits as set by the maximum
permissible bank finance (MPBF)

 CP issues are regulated by RBI Guidelines issued from time to time stipulating
term, eligibility, limits and amount and method of issuance.

 It is mandatory for CPs to be credit rated.

 GUIDELINES FOR CP ISSUE

 Introduction
 Commercial Paper (CP) is an unsecured money market instrument issued in the
form of a promissory note

 CP, as a privately placed instrument, 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, satellite 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.

 Guidelines for issue of CP are presently governed by various directives issued

by the Reserve Bank of India, as amended from time to time.
Who can Issue Commercial Paper (CP)

 Corporates and primary dealers (PDs), and the all-India financial institutions
(FIs) that have been permitted to raise short-term resources under the
umbrella limit fixed by Reserve Bank of India are eligible to issue CP.

 A corporate would be eligible to issue CP provided: (a) the tangible net worth of
the company, as per the latest audited balance sheet, is not less than Rs. 4
crore; (b) company has been sanctioned working capital limit by bank/s or all-
India financial institution/s; and (c) the borrowal account of the company is
classified as a Standard Asset by the financing bank/s/ institution/s.
 Rating Requirement

 All eligible participants shall obtain the credit rating for issuance of
Commercial Paper from either the Credit Rating Information Services of India
Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India
Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE).
 Maturity

 CP can be issued for maturities between a minimum of 7 days and a

maximum up to one year from the date of issue.

 The maturity date of the CP should not go beyond the date up to which the
credit rating of the issuer is valid.
Denominations

 CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount

invested by a single investor should not be less than Rs.5 lakh (face value).

 Limits and the Amount of Issue of CP

 The aggregate amount of CP from an issuer shall be within the limit as
approved by its Board of Directors or the quantum indicated by the Credit
Rating Agency for the specified rating, whichever is lower.

 Banks and FIs will, however, have the flexibility to fix working capital limits
duly taking into account the resource pattern of companies’ financing including
CPs.
 An FI can issue CP within the overall umbrella limit fixed by the RBI i.e., issue
of CP together with other instruments viz., term money borrowings, term
deposits, certificates of deposit and inter-corporate deposits should not exceed
100 per cent of its net owned funds, as per the latest audited balance sheet.

 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.

 Every issue of CP, including renewal, should be treated as a fresh issue.

 Investment in CP

 CP 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 Foreign Institutional Investors
(FIIs). However, investment by FIIs would be within the limits set for their
investments by Securities and Exchange Board of India (SEBI).

 Mode of Issuance
 CP can be issued either in the form of a promissory note or in a dematerialised
form through any of the depositories approved by and registered with SEBI.
 CP will be issued at a discount to face value as may be determined by the issuer.
No issuer shall have the issue of CP underwritten or co-accepted.
Preference for Dematerialisation
 While option is available to both issuers and subscribers to issue/hold CP in
dematerialised or physical form, issuers and subscribers are encouraged to
prefer exclusive reliance on dematerialised form of issue/holding.
 However, with effect from June 30, 2001, banks, FIs and PDs are directed to
make fresh investments and hold CP only in dematerialised form.

Payment of CP
The initial investor in CP shall pay the discounted value of the CP by means of a
crossed account payee cheque to the account of the issuer through IPA. On
maturity of CP, when the CP is held in physical form, the holder of the CP shall
present the instrument for payment to the issuer through the IPA. However,
when the CP is held in demat form, the holder of the CP will have to get it
redeemed through the depository and receive payment from the IPA.
 Stand-by Facility
 In view of CP being a 'stand alone' product, 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. Banks and FIs have, however, the flexibility to provide for a CP
issue, credit enhancement by way of stand-by assistance/credit, backstop
facility etc. based on their commercial judgement, subject to prudential norms
as applicable and with specific approval of their Boards.

 Non-bank entities including corporates may also provide unconditional and

irrevocable guarantee for credit enhancement for CP issue provided:
 the issuer fulfils the eligibility criteria prescribed for issuance of CP
 the guarantor has a credit rating at least one notch higher than the issuer given
by an approved credit rating agency; and
 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.
 Procedure for Issuance
 Every issuer must appoint an IPA for issuance of CP. The issuer should disclose
to the potential investors its financial position as per the standard market
practice. After the exchange of deal confirmation between the investor and the
issuer, issuing company shall issue physical certificates to the investor or
arrange for crediting the CP to the investor's account with a depository.
Investors shall be given a copy of IPA certificate to the effect that the issuer has
a valid agreement with the IPA and documents are in order.
 Role and Responsibilities
 The role and responsibilities of issuer, issuing and paying agent (IPA) and
credit rating agency (CRA) are set out below:
 (a) Issuer
 With the simplification in the procedures for CP issuance, issuers would now
have more flexibility. Issuers would, however, have to ensure that the
guidelines and procedures laid down for CP issuance are strictly adhered to.

 Issuing and Paying Agent (IPA)

 IPA would ensure that issuer has the minimum credit rating as stipulated by
the RBI and 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.
 IPA has to verify all the documents submitted by the issuer viz., copy of board
resolution, signatures of authorised executants (when CP in physical form) and
issue a certificate that documents are in order. It should also certify that it has a
valid agreement with the issuer

 Certified copies of original documents verified by the IPA should be held in the
custody of IPA.

 Every CP issue should be reported to the Chief General Manager, Financial

Market Department, Reserve Bank of India, Central Office, Fort, Mumbai.

 IPAs which are NDS member, should report the details of CP issue on NDS
platform within two days from the date of completion of the issue.
 Further, all scheduled banks, acting as an IPA, will continue to report CP
issuance details hitherto within three days from the date of completion of the
issue, incorporating details as per Schedule II till NDS reporting stabilizes to
the satisfaction of RBI.

 Credit Rating Agency (CRA)

 Code of Conduct prescribed by the SEBI for CRAs for undertaking rating of
capital market instruments shall be applicable to them (CRAs) for rating CP

 Further, the credit rating agency would henceforth have the discretion to
determine the validity period of the rating depending upon its perception about
the strength of the issuer. Accordingly, CRA shall at the time of rating, clearly
indicate the date when the rating is due for review.
 While the CRAs can decide the validity period of credit rating, they would have
to closely monitor the rating assigned to issuers vis-avis their track record at
regular intervals and would be required to make their revision in the ratings
public through their publications and website

 Documentation Procedure
 Fixed Income Money Market and Derivatives Association of India (FIMMDA)
may prescribe, in consultation with the RBI, for operational flexibility and
smooth functioning of CP market, any standardised procedure an
documentation that are to be followed by the participants, in consonance with
the international best practices.

 Violation of these guidelines will attract penalties and may also include
debarring of the entity from the CP market.
Defaults in CP market
 In order to monitor defaults in redemption of CP, scheduled banks
which act as IPAs, are advised to immediately report, on occurrence, full
particulars of defaults in repayment of CPs to the Monetary Policy Department,
Reserve Bank of India, Central Office, Fort, Mumbai, in the prescribed format.

Non-applicability of Certain Other Directions

 Nothing contained in the Non-Banking Financial Companies Acceptance of

Public Deposits (Reserve Bank) Directions, 1998 shall apply to any nonbanking
financial company (NBFC)
 RATING NOTCHES FOR CPS
 Credit rating agencies rate CPs on 5-notch scale as follows:
 P1: Indicates that the degree of safety regarding timely payment is strong
 P2: Indicates that the degree of safety regarding timely payment is strong, however, the
relative degree of safety is lower than that of P1.
 P3: Indicates that the degree of safety regarding timely payment on the instrument
adequate; however the instrument is more vulnerable to adverse effects of changing
circumstances than an instrument rated in the two higher categories.
 P4: Indicates that the degree of safety regarding timely payment on the instrument is
minimal and it is likely to be adversely affected by short-term adversity or less favourable
conditions.
 P5: Indicates that the instrument is expected to be in default on maturity or is in default.
These ratings can be further tuned with the addition of “+” and “-” symbols after the
rating.