Commercial Paper in India – Issues, Investors and Features

COMMERCIAL PAPER IN INDIA - ISSUES, INVESTORS & FEATURES

Essential for All Upcoming Bank Exams

Introduction: 

Commercial paper (CP) introduced in the 1990's, issued as a note of commitment to an unsecured use of a short-term money market instrument and is placed personally.

Objectives: 

The objective is to enable highly rated corporate borrowers and Primary Dealers to diversify their sources of short-term borrowings. 

Who can issue Commercial Paper (CP)? 

All India Financial Institutions (FIs), Companies, Primary Dealers (PDs) are issue the Commercial Paper. [For PDs or FIs no eligibility criteria except that their borrowing should be within their umbrella (overall) borrowing limit]. 

Eligibility Criteria for a Company: 

A company is eligible to issue CP if – 

• Capital limited working through banks or all India financial institutions. 
• The minimum credit rating from SEBI approved Credit Rating Agency (CRA) should not be for rating A3 rating. 
• According to the latest audited balance sheets, its tech net is not less than Worth Rs. 4 crores and 
• The creditors' accounts are classified as a standard assented by financing the banks or institutions. 

Maturity: 

Minimum 7 days and maximum up to 1 year (which should not fall beyond the validity period of credit rating). 

Amount: 

Minimum Rs. 5 lakh or multiple thereof, Aggregate amount as approved by Board or indicated by CRA, whichever is lower. 

Time period ceiling: 

The issue should increase the total amount by 2 weeks from the date of opening. Each CP shall have the same maturity date even when issued on different dates. Each issue of renewable paper documents should be considered as a new issue. 

Investors: 

Individuals, banking companies, other corporate bodies registered or incorporate in India and unincorporated bodies, Non- Resident Indians and FIIs (for FIIs within the limits set for their investments by SEBI). 

Mode of Insurance: 

Through any of the depositories approved by and registered with Securities and Exchange Board of India (SEBI). On 1st July, 2001 PDs/FIs/Banks shall hold Cps in demat from only. 

Stand-by Facility: 

Banks and Financial Institutions have the flexibility to increase credit through a CP issue, standby assistant or credit back step facility, on the basis of their business decisions and according to the conditions set by them. 

Features: 

• Issuing and paying agents would report insurance of CP on BDS by the end of 2nd day. 
• No issuer will be issued or accepted on commercial paper. 
• OTC trades to be reported within 15 min at the Fixed Income Money Market and Derivatives Association of India (FIMMDA) platform. Over-the-counter (OTC) trade settlement period is T+0 or T+1. 
• It is issued at a discounted price value. 
• Issuer can buy back through secondary market after 7 days from date of issue. 
• Call or put option is not available.