Commercial Paper

1. What is Commercial Paper (CP)?

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.
2. When it was introduced?
It was introduced in India in 1990.
3. Why it was introduced?
It was introduced in India in 1990 with a view to enablin hihly rated corporate borrowers to diversify their sources of short!
term borrowins and to provide an additional instrument to investors. "ubse#uently$ primary dealers and all!India financial
institutions were also permitted to issue CP to enable them to meet their short!term fundin re#uirements for their operations.
4. Who can issue CP?
Corporates$ primary dealers (P%s) and the &ll!India 'inancial Institutions ('Is) are eliible to issue CP.
5. Whether all the corporates would automatically be eliible to issue CP?
(o. & corporate would be eliible to issue CP provided )
a. the tanible net worth of the company$ as per the latest audited balance sheet$ is not less than *s. + crore
b. company has been sanctioned workin capital limit by bank,s or all!India financial institution,s- and
c. the borrowal account of the company is classified as a "tandard &sset by the financin bank,s, institution,s.
!. "s there any ratin re#uirement $or issuance o$ CP? %nd i$ so& what is the ratin re#uirement?
.es. &ll eliible participants shall obtain the credit ratin for issuance of Commercial Paper either from Credit *atin
Information "ervices of India /td. (C*I"I/) or the Investment Information and Credit *atin &ency of India /td. (IC*&) or the
Credit &nalysis and *esearch /td. (C&*0) or the 'I1C2 *atins India Pvt. /td. or such other credit ratin aency (C*&) as
may be specified by the *eserve 3ank of India from time to time$ for the purpose.
1he minimum credit ratin shall be &!4 [As per rating symbol and definition prescribed by Securities and Exchange Board of
India (SEBI)].
1he issuers shall ensure at the time of issuance of CP that the ratin so obtained is current and has not fallen due for review.
'. What is the minimum and ma(imum period o$ maturity prescribed $or CP?
CP can be issued for maturities between a minimum of 5 days and a ma6imum of up to one year from the date of
issue.2owever$ the maturity date of the CP should not o beyond the date up to which the credit ratin of the issuer is valid.
). What is the limit up to which a CP can be issued?
1he areate amount of CP from an issuer shall be within the limit as approved by its 3oard of %irectors or the #uantum
indicated by the Credit *atin &ency for the specified ratin$ whichever is lower.
&s reards 'Is$ they can issue CP within the overall umbrella limit prescribed in the 7aster Circular on *esource *aisin
(orms for 'Is$ issued by %38% and updated from time!to!time.
*. "n what denominations a CP that can be issued?
CP can be issued in denominations of *s.9 lakh or multiples thereof.
1+. ,ow lon can the CP issue remain open?
1he 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.
11. Whether CP can be issued on di$$erent dates by the same issuer?
.es. CP may be issued on a sinle date or in parts on different dates provided that in the latter case$ each CP shall have the
same maturity date. 'urther$ every issue of CP$ includin renewal$ shall be treated as a fresh issue.
12. Who can act as "ssuin and Payin %ent ("P%)?
8nly a scheduled bank can act as an IP& for issuance of CP.
13. Who can in-est in CP?
Individuals$ bankin companies$ other corporate bodies (reistered or incorporated in India) and unincorporated bodies$ (on!
*esident Indians ((*Is) and 'orein Institutional Investors ('IIs) etc. can invest in CPs. 2owever$ investment by 'IIs would be
within the limits set for them by "ecurities and 06chane 3oard of India ("03I) from time!to!time.
14. Whether CP can be held in dematerilaised $orm?
.es. CP can be issued either in the form of a promissory note ("chedule I iven in the 7aster Circular!:uidelines for Issue of
Commercial Paper dated ;uly 1$ 4011 and updated from time )to!time) or in a dematerialised form throuh any of the
depositories approved by and reistered with "03I. 3anks$ 'Is and P%s can hold CP only in dematerialised form.
15. Whether CP is always issued at a discount?
.es. CP will be issued at a discount to face value as may be determined by the issuer.
1!. Whether CP can be underwritten?
(o issuer shall have the issue of Commercial Paper underwritten or co!accepted.
1'. Whether CPs are traded in the secondary mar.et?
.es. CPs are actively traded in the 81C market. "uch transactions$ however$ are to be reported on the 'I77%& reportin
platform within 19 minutes of the trade for dissemination of trade information to market participation thereby ensurin market
transparency.
1). What is the mode o$ redemption?
Initially the investor in CP is re#uired to pay only the discounted value of the CP by means of a crossed account payee che#ue
to the account of the issuer throuh IP&. 8n maturity of CP$
(a) when the CP is held in physical form$ the holder of the CP shall present the instrument for payment to the issuer throuh
the IP&.
(b) when the CP is held in demat form$ the holder of the CP will have to et it redeemed throuh the depository and receive
payment from the IP&.
1*. Whether /tand by $acility is re#uired to be pro-ided by the ban.ers01"s $or CP issue?
CP bein a <stand alone= product$ it would not be obliatory in any manner on the part of banks and 'Is to provide stand!by
facility to the issuers of CP.
2owever$ 3anks and 'Is have the fle6ibility to provide for a CP issue$ credit enhancement by way of stand!by assistance,credit
backstop facility$ etc.$ based on their commercial >udement and as per terms prescribed by them. 1his will be sub>ected to
prudential norms as applicable and sub>ect to specific approval of the 3oard.
2+. Whether non2ban. entities0corporates can pro-ide uarantee $or credit enhancement o$ the CP issue?
.es. (on!bank entities includin corporates can provide unconditional and irrevocable uarantee for credit enhancement for
CP issue provided ?
a. the issuer fulfils the eliibility criteria prescribed for issuance of CP-
b. the uarantor has a credit ratin at least one notch hiher than the issuer by an approved credit ratin aency and
c. the offer document for CP properly discloses? the networth of the uarantor company$ the names of the companies to which
the uarantor has issued similar uarantees$ the e6tent of the uarantees offered by the uarantor company$ and the
conditions under which the uarantee will be invoked.
21. 3ole and responsibilities o$ the "ssuer0"ssuin and Payin %ent and Credit 3atin %ency.
"ssuer4
a. 0very issuer must appoint an IP& for issuance of CP.
b. 1he issuer should disclose to the potential investors its financial position as per the standard market practice.
c. &fter the e6chane of deal confirmation between the investor and the issuer$ issuin company shall issue physical
certificates to the investor or arrane for creditin the CP to the investor@s account with a depository.
Investors shall be iven a copy of IP& certificate to the effect that the issuer has a valid areement with the IP& and documents
are in order ("chedule II iven in the 7aster Circular!:uidelines for Issue of Commercial Paper dated ;uly 1$ 4011 and
updated from time )to!time).
"ssuin and Payin %ent
a. IP& would ensure that issuer has the minimum credit ratin as stipulated by the *3I and amount mobilised throuh issuance
of CP is within the #uantum indicated by C*& for the specified ratin or as approved by its 3oard of %irectors$ whichever is
lower.
b. IP& has to verify all the documents submitted by the issuer viA.$ copy of board resolution$ sinatures of authorised
e6ecutants (when CP in physical form) and issue a certificate that documents are in order. It should also certify that it has a
valid areement with the issuer ("chedule II iven in the 7aster Circular!:uidelines for Issue of Commercial Paper dated ;uly
1$ 4011 and updated from time )to!time).
c. Certified copies of oriinal documents verified by the IP& should be held in the custody of IP&.
Credit 3atin %ency
a. Code of Conduct prescribed by the "03I for C*&s for undertakin ratin of capital market instruments shall be applicable to
them (C*&s) for ratin CP.
b. 'urther$ the credit ratin aencies have the discretion to determine the validity period of the ratin dependin upon its
perception about the strenth of the issuer. &ccordinly$ C*& shall at the time of ratin$ clearly indicate the date when the
ratin is due for review.
c. Bhile the C*&s can decide the validity period of credit ratin$ C*&s would have to closely monitor the ratin assined to
issuers vis!a!vis their track record at reular intervals and would be re#uired to make its revision in the ratins public throuh
its publications and website
22. "s there any other $ormalities and reportin re#uirement with reard to CP issue?
'i6ed Income 7oney 7arket and %erivatives &ssociation of India ('I77%&)$ may prescribe$ in consultation with the *3I$ any
standardised procedure and documentation for operational fle6ibility and smooth functionin of CP market. Issuers , IP&s may
refer to the detailed uidelines issued by 'I77%& on ;uly 9$ 4001 in this reard$ and updated from time!to!time.
0very CP issue should be reported to the Chief :eneral 7anaer$ *eserve 3ank of India$ 'inancial 7arkets %epartment$
Central 8ffice$ 'ort$ 7umbai throuh the Issuin and Payin &ent (IP&) within three days from the date of completion of the
issue$ incorporatin details as per "chedule III iven in the 7aster Circular!:uidelines for Issue of Commercial Paper dated
;uly 1$ 4011 and updated from time!to!time.