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 enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers (PDs), and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. The Guidelines for issue of CP are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time.
A COMPANY WOULD BE ELIGIBLE TO ISSUE CP PROVIDED:
- The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crores;
- The company has been sanctioned working capital limit by bank/s or FIs; and
- The borrower account of the company is classified as a Standard Asset by the financing bank/ institution.
Merits of Commercial Paper
1. It provides more funds compared to other sources. The cost of commercial paper to the issuing firm is lower than the cost of commercial bank loans.
2. It is freely transferable in nature, therefore it has high liquidity also.
3. It produce a continuing source of funds.
Procedure for Issuance
Credit Rating
All eligible participants shall obtain credit rating for issuance of CP from any one of the SEBI registered Credit Rating Agencies.
Maturity
CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue.
Denomination
CP can be issued in denominations of Rs. 5 lakh and multiples thereof. The amount invested by a single investor should not be less than Rs. 5 lakh (face value).
Amount
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 CRA 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 company’s financing.
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.
Investment in CP
CP may be issued to individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non- Resident Indians and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the limits set for them by SEBI and compliance with the provisions of the FEMA 1999, the Foreign Exchange (Deposit) Regulations, 2000 and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, as amended from time to time.
Mode of Issuance
CP can be issued either in the form of a promissory note and held in physical form or in a dematerialized form through any of the depositories approved by and registered with SEBI. Provided all RBI regulated entries can deal in and hold CP only in dematerialized form through such depositories. CP will be issued at a discount to face value as may be determined by the issuer. No issuer shall have to issue of CP underwritten or co-accepted.
Dematerialisation
While option is available to both issuers and subscribers to issue/ hold CP in dematerialized or physical form, issuers and subscribers are encouraged to opt for dematerialized form of issue/ holding. However, banks, FIs and PDs are required to make fresh investments and hold CP only in dematerialized form.
Payment
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 CP is held in physical form, the holder of CP shall present the instrument for payment to the issuer through the IPA. However, when Cp is held in demat form, the holder of CP will have to get it redeemed through the depository and receive payment from the IPA.
ROLE AND RESPONSIBILITIES OF ISSUING AND PAYING AGENT (IPA)
- ONLY SCHEDULED BANK CAN ACT AS IPA.
- The IPA would ensure that the issuer has the minimum credit rating as stipulated by RBI and the amount mobilized 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.
- The IPA has to verify all the documents submitted by the issuer, viz., copy of board resolution, signatures of authorized executants (when CP is issued in physical form) and issue a certificate to this effect.
- Certified copies of original documents, verified by the IPA, should be held in the custody of IPA.
- All scheduled banks, acting as the IPAs should submit the data pertaining to CP issuances on the Online Returns Filing System (ORFS) module of the RBI within two days from the date of issuance of CP.
- The IPA shall certify that it has a valid agreement with the issuer.
