introduction

to Commercial Paper

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What is commercial paper ?

Commercial Paper (CP) is an unsecured money market instrument issued
as a promissory note. It is a short-term funding tool that highly rated
companies, primary dealers (PDs), and all-India financial institutions
(AIFIs) can use, typically to meet short-term funding and working capital
requirements. The Reserve Bank of India's (RBI's) guidelines govern the
issuance of CPs.
What are the benefits of CPs?
Interest rates on CPs can be significantly lower than on traditional forms of
working capital borrowings, including bank credit. CPs also offer issuers
flexibility to adjust the maturity of instruments to match expected cash
inflows (from trade receivables), if any. Since CPs are short-term
instruments, they are used generally as bridge finance till such time as
trade receivables are realised. If there are no operating cash flows
available for repayment of CPs, the CPs will be refinanced on maturity.
What is the eligibility for issuance of CP?
For Corporates:
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The corporate should have a minimum tangible net worth of Rs.40
million as per the latest available audited balance sheet;
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The corporate should have sanctioned working capital limits from
banks or FIs;
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The corporate should be a standard asset in the books of banks or FIs.
For PDs and AIFIs:
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Only PDs/AIFIs that have been permitted by RBI to raise short-term
resources can issue CP. The amount of CP issued cannot exceed the
limit set for the PD/AIFI by RBI.
In addition, the following conditions need to be met:
Issuers need to obtain a valid credit rating for the issue of CPs from
CRISIL or any other rating agency specified by RBI; the credit rating
should be at least 'P2' (on CRISIL's rating scale) or its equivalent.
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CP borrowings cannot exceed the lower of:
a.
The rated amount for the CP issue
b. The amount authorised by the resolution of the board of directors
(if the issuer is a corporate) or set by RBI (if the issuer is a PD or AIFI)
In all cases, any other eligibility criteria prescribed by RBI from time to
time will also be applicable.
l

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What is the tenor of CP?

CPs can be issued for maturities ranging from seven days to a year from the
date of issue.

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What is the minimum possible size and denomination for CPs?

CPs can be issued in denominations of Rs.500,000 and multiples thereof.
One unit of CP is equivalent to Rs.500,000 of maturity value.

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Who can invest in CPs?

The following categories of investors can invest in CPs:
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Individuals
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Banking companies
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Other corporate bodies registered/incorporated in India
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Unincorporated bodies
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Non-resident Indians (NRIs)
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Foreign institutional investors (FIIs) within overall limits set by the
Securities and Exchange Board of India (SEBI)
What is the maximum amount that a company can raise as CP?
RBI's guidelines have de-linked CPs from working capital limits. In addition,
RBI has allowed banks and non-banks to provide stand-by assistance/credit
back-stop facilities/ guarantee to issuers for credit enhancement of CPs.
Consequently, a company can now raise CPs in excess of its working capital
limits; its ability to do so will depend entirely on limits set by the credit rating
agency, and the stand-by assistance/guarantee provided.
What is the credit enhancement mechanism for CPs? What are its
benefits?
RBI guidelines permit banks and non banks to provide stand-by
assistance/credit back-stop facilities/guarantee to issuers for credit
enhancement of CP issues. Companies with low ratings can obtain credit
enhancement for CPs based on letters from banks offering stand-by
assistance, or on unconditional, irrevocable guarantees from non-banks.
Letters offering stand-by assistance commit the guarantor to providing
drawing power to the issuer at the time of CP redemption, such that the CP
can be redeemed in full. This results in an enhancement in the rating of the
CP from the issuer's rating to that of the guarantor. The issuer, thus, enjoys
the benefits arising from a higher rating.

introduction
to Commercial Paper

A.

What is the procedure for issuing and redeeming CPs?

Flowchart 1 indicates the process for issuance of CPs:

Flowchart 1: Allotment of CPs

Company conducts internal checks on its
eligibility to issue CPs

Decides issue size

Applies to CRISIL for rating of CP issue

Appoints issuing and paying agent (IPA)

Issuer executes agreement with depository

for issue of CPs in demateralised form

Prepares documents pertaining to CP issues

Gets quotes from investors along with their

depository participant (DP) ID and client ID

Finalises allotment of CPs; Adjudicates on

stamp duty on the Jumbo CP certificate
documentation

Instructs depository to credit

CPs to IPA's CP allotment
account; IPA issues IPA
certificates to investors

Company gives investor details

such as DP ID, client ID, and allotted
quantity to registrar and transfer (R&T)
agent /IPA for credit to investor's
account the next day

Receives HV cheque
from investor

Funds cleared in HV
clearing the next day

Investor's account is credited with the CPs a day

after IPA gets clear funds in its account

Flowchart 2 indicates the process for redemption of CPs:

Flowchart 2: Process for redemption of CPs

The registrar and transfer (R&T) agent receives weekly download
on beneficiary position as on every Friday from NSDL/CDSL;
download includes details of new investors who have
purchased CPs in secondary market

Beneficiary position at the time of redemption is

communicated to issuer

Before redemption, issuer ensures that all investors, including

new investors, are aware of DP ID and client ID of the
redemption account of the IPA

Investor transfers CPs to redemption account of IPA before

3:00 pm on the day prior to day of maturity

IPA provides statement of transaction of redemption

account received from DP to issuer

Investor provides statement of transaction/client master

list/introduction letter/proof of identity to IPA

IPA provides redemption cheque to investor after ensuring that

CPs have been transferred to its redemption account

After ensuring that all CPs issued have been received in the
redemption account, and that payment has been made to investors,
issuer certifies to NSDL / CDSL that payment has been made to all
investors and that securities in the system can now be redeemed

Issuer advises R&T agent for debit corporate action to extinguish

securities from NSDL / CDSL system

introduction
to Commercial Paper

A.

What is the procedure for issuance and redemption of CPs in the

dematerialised form?
Theprocedureforissuingcommercialpaperinthedematerialisedformisasfollows:
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The issuer receives the ISIN number created, by submitting the letter
of intent to the depository in the prescribed format; all securities held
in the specified ISIN number will have the same maturity date.
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Before issuing the CP, the issuer needs to submit all required
documentation to the IPA; this includes the duly-stamped and
executed single usance promissory note (UPN) for the total face
value of the CPs. The IPA will have the custody of the UPN, and ensure
that electronic securities have been issued in lieu of the certificate.
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The issuer finalises the allotment of CPs to investors, and exchanges
deal confirmation notes with them. The issuer makes the ISIN
available to the IPA, and instructs the depository to credit the CP into
the IPA's CP allotment account.
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The issuer provides a list of investors to the IPA; the list will include
particulars such as the value and date of deal, name and address of
counterparty, details of investor's DP account, FV of the CP to be
delivered and the consideration to be received, and the consolidated
list of CPs to be issued for each value date.
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The IPA issues IPA certificates to investors, and receives
consideration by way of banker's cheque/demand draft from
investors, before transferring the CPs to the respective
dematerialised accounts of investors. Funds are deposited in the
issuer's account with IPA.

The procedure for redeeming commercial paper in the dematerialised

form is as follows:
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The CP holder approaches the DP, and gives instructions for transfer
of CPs to the IPA's CP redemption account. The transfer should be
done before 3 pm one working day before the maturity date, to give
sufficient time to the IPA to process the papers and arrange to effect
payments on the CP's due date.
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After receiving confirmation from the DP that CPs have been received
in the CP redemption account, the IPA arranges for payment to
investors on the maturity date through high-value instruments.
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Payments by the IPA will be subject to availability of funds in the
issuer's CP account. After paying CP holders, the IPA directs the R&T
agent to extinguish the securities quoting the ISIN.
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Who can act as an IPA? What is the IPA's role?

RBI guidelines allow only scheduled commercial banks to act as IPAs. The
roles and responsibilities of the IPA include the following:
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Ensuring that the issuer meets RBI norms for CP issue
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Verifying and certifying that documents submitted by the issuer
(these include a copy of the board's resolution and signatures of
authorised executants) are in order.

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Holding original documents in custody after verification

Receiving discounted CP proceeds from investors at the time of issue
Reporting details of CP issue on negotiated dealing system platform
within two days of completion of the issue.
Paying back the face value to investors at maturity, provided the issuer
arranges for adequate funds in time.

What are the costs involved in issuance of CP?

The typical costs in issuing CPs include:
Interest paid to investors
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IPA fees
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Stamp duty (including for CPs issued in dematerialised form)
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Rating fees
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Arranger fees
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DP and R&T agent fees
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Depository fees
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What are the savings from CP issuance?
Table 1 indicates the cost savings that are available to CP issuers over the
utilisation of working capital limits.
CP Issue size in Rs.

Rs.500,000,000

Tenor in days
Discount rate of CPs
Cash credit rate
Net discounted value
Investors yield
Stamp duty for 90 days
IPA fees for 90 days
Arrangers' fee
Credit rating fee
Depository (NSDL / CDSL) fees
Registrar's fees and other charges
Total CP cost in Rs.
Total CC cost in Rs.
Total saving
Total annual saving
Annual Saving

90
6.50%
11.00%
492,112,714
7,887,286
61,644
61,644
500,000
500,000
1,100
1,000
9,012,674
13,347,715
4,335,041
17,581,000
3.52%

Note: CP discounting rates vary on a day-to-day basis; the impact of change

in issue amount is not considerable, as most costs are variable.

introduction
to Commercial Paper

Abbreviations:
CP
PD
AIFI
RBI
FI
NRI
FII
SEBI
IPA
DP
ID
HV
R&T
NSDL
CDSL
ISIN
UPN
FV

Commercial Paper
Primary Dealer
All India Financial Institution
Reserve Bank of India
Financial Institution
Non Resident India
Foreign Institutional Investor
Securities Exchange Board of India
Issuing & Paying Agent
Depository Participant
Identification Number
High Value
Registrar & Transfer Agent
National Securities Depository Limited
Central Depository Services (India) Limited
International Security Identification Number
Usance Promissory Note
Face Value

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from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or
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