Commercial Paper in India

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Commercial Paper in India

Commercial paper was first issued in the year 1990 in India as a short-term instrument. Commercial papers were introduced as a privately placed instrument for the Non-Banking Financial Companies (NBFC Registration) mainly to enable highly rated corporate borrowers to diversify their pattern of short time borrowings and to provide an enhanced instrument to the investors. Eventually, all the primary dealers and all India Financial Institutions were permitted to issue commercial paper that enables them to meet the short-term funding requirements of their operations.

Advantages of Commercial Paper

Prior to the introduction of commercial paper in the Indian money market i.e. before 1990, corporate companies used to depend on the crude and traditional method of borrowing working capital from the commercial banks by pledging the inventory of raw materials as collateral security. This is time-consuming for the borrowing companies in availing the short-term funds for day-to-day production activities. Commercial paper has emerged as an effective instrument for all corporate companies to avail the short-term funds from the money market within the shortest possible time limit by avoiding the hassles of direct negotiation with the commercial banks for availing the short-term loans.

Issuing Commercial Paper

Commercial paper can be issued into the market by the following members:

Leasing and Finance Companies
Manufacturing Companies
Financial Institutions

Eligibility for Issuing Commercial Paper

Companies, Primary Dealers (PDs) and Finance Institution (FIs) are eligible to issue commercial paper. Commercial Paper (CPs) can be issued based on the guidelines set by RBI. The following conditions have to be fulfilled by corporates to receive privileges for issuing commercial paper:

The tangible net worth of the company should not be less than 4 Crores, as per the latest audited Balance-Sheet.
The companies should have the ‘sanctioned working capital limit’ by the banks or any Financial Institutions (FIs).
The Financial Institutions or Banks should classify the ‘Borrowal Account’ as a Standard asset.

Credit Rating

Before issuing commercial paper, all eligible participants/issuers must obtain the credit rating for the issuance of commercial paper from any one of the SEBI registered Credit Rating Agencies. The following are the criteria to obtain commercial paper with credit ratings:

The Minimum credit rating to obtain the CP is A3, as per the rating symbol and definition prescribed by SEBI.
The issuer should ensure that the credit rating provided is current and have not fallen due for review.

Tenor

Commercial paper can be issued if:

The maturity is a minimum of 7 Days and a maximum of one year from the date of Issue.
Commercial paper should not be provided if the credit rating is beyond the date of its validity.
The denomination for issuing commercial paper must be Rs.5 lakhs and its multiples.
A single investor should not invest an amount more than Rs. 5 lakh.

Investment in Commercial Paper

Commercial papers are issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India, Non-Resident Indians (NRIs) and also Foreign Institutional Investors (FIIs). The investments are made as follows:

Investment by FIIs in CPs should be based on the conditions regulated by the Securities Exchange Board of India (SEBI).
Investments should be in compliance with the provisions of Foreign Exchange Management Act-1999, The Foreign Exchange (Deposit) Regulations, 2000 and the Foreign Exchange Management Regulations (Transfer), 2000.