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. The guidelines for issue of CP incorporating all the amendments issued
till date is given below for ready reference.
Who
can Issue Commercial Paper (CP)
2. 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.
*:
The system of satellite dealers has since been discontinued with effect from June
1, 2002.
3. 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
4. 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) or the FITCH Ratings India Pvt. Ltd. or such other credit
rating agencies as may be specified by the Reserve Bank of India from time to
time, for the purpose. The minimum credit rating shall be P-2 of CRISIL or such
equivalent rating by other agencies. 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.
Maturity
5. CP
can be issued for maturities between a minimum of 15 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
6. 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
7. CP
can be issued as a 'stand alone' product. 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.
8. 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.
9. 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 CP issue should
be reported to the Principal Monetary Policy Adviser, Monetary Policy Department
(MPD), Reserve Bank of India, Central Office, Mumbai through the Issuing and Paying
Agent (IPA) within three days from the date of completion of the issue, incorporating
details as per Schedule II.
10. Every
issue of CP, including renewal, should be treated as a fresh issue.
Who
can Act as Issuing and Paying Agent (IPA)
11. Only
a scheduled bank can act as an IPA for issuance of CP.
Investment
in CP
12. 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
13. CP can be
issued either in the form of a promissory note (Schedule I) or in a dematerialised
form through any of the depositories approved by and registered with SEBI.
14. CP
will be issued at a discount to face value as may be determined by the issuer.
15.
No issuer shall have the issue of CP underwritten or co-accepted.
Preference
for Dematerialisation
16. 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
17. 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
18. 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, back-stop facility etc. based on their commercial
judgement, subject to prudential norms as applicable and with specific approval
of their Boards.
19. 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
20. 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 (Schedule III).
Role
and Responsibilities
20. 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.
(b) 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 (Schedule III).
- Certified
copies of original documents verified by the IPA should be held in the custody
of IPA.
(c) 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-a-vis 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
21. 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 and documentation that are to be followed by the participants,
in consonance with the international best practices.
22. Violation
of these guidelines will attract penalties and may also include debarring of the
entity from the CP market.
Defaults
in CP market
23. 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 format as given in Annex I.
Non-applicability
of Certain Other Directions
24. Nothing
contained in the Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 1998 shall apply to any non-banking financial company
(NBFC) insofar as it relates to acceptance of deposit by issuance of CP, in accordance
with these Guidelines.
25. Definitions
of certain terms used in the Guidelines are provided in the Annex II.
Sr.No |
Reference No. | Date |
Subject |
1. |
IECD.No.PMD.15/87 (CP)-89/90 |
January 3,1990 | Issue
of Commercial paper (CP) |
2. |
IECD.No.PMD.19/87 (CP)-89/90 |
January 23,1990 | Issue
of Commercial paper (CP) |
3. |
IECD.No.PMD.28/87 (CP)-89/90 |
April 24,1990 | Commercial
Paper (CP) - Amendment to Directions. |
4. | IECD.No.PMD.1/08.15.01/93-94 |
July 2,1990 | Guidelines
for provision of factoring services |
5. |
IECD.No.PMD.2/87 (CP)-90/91 |
July 7,1990 | Commercial
Paper (CP) - Renewal of existing issue. |
6. | IECD.No.PMD.57/87
(CP)-90/91 | May 30,1991 |
Commercial Paper (CP) - Amendment to Directions. |
7. |
IECD.No.16/PMD/87 (CP)-91/92 |
August 20, 1991 | Issue
of Commercial paper (CP) |
8. |
IECD.No.39/PMD/87 (CP)-91/92 |
December 20, 1991 | Commercial
Paper (CP) - Amendment to Directions. |
9. |
IECD.No.49/CC&MIS/87/91-92 |
February 7, 1992 |
Issue of Commercial paper (CP) - Submission of Returns etc. |
10. | IECD.No.63/08.15.01/91-92 |
May 13,1992 | Commercial
Paper (CP) - Amendment to Directions. |
11. |
IECD.No.34/08.15.01/92-93 |
May 19,1993 | Commercial
Paper (CP) – Application of Stamp Duty |
12. | IECD.No.13/08.15.01/93-94 |
October 5, 1993 | Commercial
Paper (CP) - Amendment to Directions. |
13. |
IECD.No.17/08.15.01/93-94 |
October 18, 1993 | Commercial
Paper (CP) - Amendment to Directions. |
14. |
IECD.No.25/08.15.01/93-94 |
December 17, 1993 | Issue
of Commercial Paper (CP) |
15. |
IECD.No.19/08.15.01/94-95 |
October 20, 1994 | Commercial
Paper - Stand by Arrangement |
16. |
IECD.No.28/08.15.01/95-96 |
June 20, 1996 | Commercial
Paper (CP)- |
17 |
IECD.No.3/08.15.01/96-97 |
July 25, 1996 | Commercial
Paper (CP) - Amendment to Directions. |
18. |
IECD.No.14/08.15.01/96-97 |
November 5, 1996 | Commercial
Paper |
19. |
IECD.No.25/08.15.01/96-97 |
April 15, 1997 | Commercial
Paper |
20. |
IECD.No.14/08.15.01/97-98 |
October 27, 1997 | Commercial
Paper |
21. |
IECD.No.43/08.15.01/97-98 |
May 25, 1998 | Commercial
Paper |
22. |
MPD.48/07.01.279/2000-01 |
July 6, 2000 |
Guidelines for Issue of Commercial Paper |
23. |
IECD. No. 15/08.15.01/2000-01 |
April 30, 2001 |
Guidelines for Issue of Commercial Paper |
24. |
IECD.No.2/08.15.01/2001-02 |
July 23, 2001 | Guidelines
for Issue of Commercial Paper |
25. |
IECD.No.11/08.15.01/2002-03 |
November 12, 2002 | Guidelines
for Issue of Commercial Paper |
26. |
IECD. No. 19/08.15.01/2002-03 |
April 30, 2003 | Guidelines
for Issue of Commercial Paper |
27 |
IECD. No. /08.15.01/2003-04 |
August 19, 2003 | Guidelines
for Issue of Commercial Paper – Defaults in Commercial Paper market |