Indian Debt Market Research

Special Report

THE A TO Z OF ISSUING
COMMERCIAL PAPER IN INDIA

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 Indian Debt Market Research THE A TO Z OF ISSUING
Special Report COMMERCIAL PAPER IN INDIA

Overview The volumes of outstanding CPs

issued by companies in the last few
Commercial Paper (CP) is popular, months are given below:
among highly rated entities, as a tool
for diversifying their sources of short- Fortnight Ended Total Amt. O/s
term borrowings and for reducing the 2005 (Rs. in Crore)
cost of such borrowings. 15 15214
April
30 15598
15 16078
May
31 17182
The illustrative rates for the
15 17522
commercial paper borrowings in the Jun
30 17797
last six months are given below: 15 18157
July
31 18349
15 19226
8.50 Aug
8.00 31 19206
7.50
15 19799
7.00 Sep
6.50 30 19695
6.00
15 18562
5.50 Oct
5.00 31 18546
15 17903
Nov
De 5
05

Fe 6
Ap 5

06
Au 5
M 5

Se 5

O 5

05
Ju 5

No 5
-0

0
r- 0

l-0

0
-0

-0
v-
n-

n-

b-
g-

p-

c-

30 17768
ar

ay

ct
Ju

Ja
M

90 Days 180 Days 15 16871

Dec
Source: FIMMDA 31 17180
2006
15 17225
CP also provides an additional Jan
31 16321
instrument to investors with short-
Source: RBI
term surplus funds.
In this booklet an attempt is made to
provide essential information to
companies intending to issue
Commercial Paper

For information please contact:

CREDIT ANALYSIS & RESEARCH
LIMITED (CARE)
4th Floor, Godrej Coliseum,
Somaiya Hospital Road
Off Eastern Express Highway
Sion (East) – 400022
Tel 55543456
March 2006 Fax 55543457
E-mail: care@careratings.com

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1. What is Commercial Paper?
Commercial paper, or CP as it is popularly
known, is in the nature of an unsecured
usance promissory note, transferable by
endorsement and delivery. It is of fixed
maturity.
2. Who can issue CP?
Corporates, 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 following are the eligibility criteria, as
per the extant guidelines:
1] The company should have a
minimum tangible net worth of Rs. 40
mn, as per the latest audited balance
sheet.
2] The company should have been
sanctioned working capital limits by
banks/FIs and should be classified as
a 'Standard Asset' by the financing
bank(s) / FIs.
3] The company should have minimum
credit rating from an agency
approved by RBI (Such minimum
rating from CARE is PR 2). 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.
4] 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.
3. What constitutes tangible net worth?
As per RBI guidelines, tangible net worth
would be calculated as follows:
A. Paid-up capital
Add:
B. General Reserves,
C. Share premium account,
D. Capital debenture redemption reserve,
E. Other free reserves not being created
to meet any future liability or
depreciation in assets or bad debts or
reserves created by revaluation of
assets. Other free reserves include
Dividend Equalisation Reserve,
Development Rebate Reserve,
Development Allowance Reserve,
Investment Allowance Reserve and
Capital Reserve created through profit
on sale of assets realised in cash or
otherwise.
Deduct:
F. Accumulated losses
G. Deferred revenue expenditure
H. Other intangible assets.
4. What are the minimum and
maximum amounts of issue of CP?
The minimum amount of issue is Rs.5
lakh and multiples thereof. CP can be
issued for a period of 7 days to 12
months. The aggregate amount of CP
from an issuer shall be within the limit as
approved by its Board of Directors or the
quantum for which rating is availed,
whichever is lower. However, banks & FIs
have the flexibility to fix working capital
limits taking into account the borrower's
financing pattern, including CPs.
5. What is the process for issuing CP?
Once a company decides to issue CP for
a specific amount, a resolution is required
to be passed by the Board of Directors
approving the issue and authorising the
official(s) to execute the relevant
documents, as per RBI norms. The CP
issue is required to be rated by an
approved credit rating agency.
The company selects the Issuing and
Paying Agent, which has to be a
scheduled bank. The issuer should
disclose to its potential investors its
financial position. The company may also
arrange for dealers for placement of CPs.
The issue has to be completed within two
weeks of opening. 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
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CP issue needs to be reported to RBI
through the Issuing and Paying Agent. CP
is issued at a discount to the face value.
6. Costs Involved for issuing CP?
The following costs are involved in the
issue of CP:
i) Stamp duty - This varies across the
tenure of the instrument and the investor
profile, and would be as applicable in the
respective states.
ii) Rating fees - 0.1% (for initial rating
from CARE)
iii) Issuing and paying agent fee -
Nominal
7. Responsibilities of Issuing & 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 Credit Rating Agency (CRA)
for the specified rating or as approved by
the 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 and issue a certificate that
documents are in order. It should also
certify that it has a valid agreement with
the issuer. Certified copies of original
documents verified by the IPA should be
held in the custody of IPA. For
transparency and benchmarking, IPA
should report CP issues on NDS within
two days from the completion of the issue.
8. Responsibilities of Credit Rating
Agency (CRAs)
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 i.e. CARE, 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, CRAs would have
to closely monitor the rating assigned to
issuers vis-à-vis their track record at
regular intervals and would be required to
make its revision in the ratings public
through its publications and website.
9. Mode of Issuance
Earlier, CP were issued either in the form
of a promissory note or in a
dematerialised form through any of the
depositories approved by and registered
with SEBI. However, with effect from June
30, 2001, banks, FIs and PDs were
directed to make fresh investments and
hold CP only in dematerialised form.
10. Is there a provision for grace
period for redemption of CP liability?
No. If the date of maturity of CP falls on a
holiday, payment of CP shall be made on
the preceding working day. If as a result
of this, the usance of CP falls below the
minimum period of 15 days, the CP will be
deemed to be issued for a period of less
than 15 days. A company planning CP
issue should take note of this. Under the
Negotiable Instruments’ Act, the day on
which the instrument is drawn has to be
excluded in calculating the maturity of the
note. The maturity date of the CP should
not go beyond the date up to which the
credit rating of the issuer is valid.
11 Who can invest in CP?
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). When NRIs subscribe to CP
issue, the conditions regarding non-
repatriability and non-endorsability are
indicated on the CP.
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12 What are the advantages for the
investors?
Investors get good returns on their short-
term surplus funds with relatively low risk.
13 What is the saving for a corporate
going in for a CP?
a] CP gives highly rated companies
access to cheaper funds as
compared to the working capital
finance from banks or other sources.
b] It minimises documentation
requirements.
c] The maturity of CP can be suitably
adjusted as per the cash flow
requirements of the issuers.
14. Does a CP issue enhance the
finances for the issuing company?
As per RBI circular dated October 10,
2000, CP has been delinked from the
working capital limits and can be issued
as a 'standalone' product upto limits
specified by the Board of Directors. Hence
it could enhance the finances of a
company.
15. What are the documents required
by the investors?
The following are the documents required
by the investors:
a] Original certificates stamped.
b] Copies of the Board Resolution and
signatures of Authorised Signatory
(ies) of the corporate.
c] Rating letter from an approved credit
rating agency like CARE.
16. Can CP be issued directly to
investors?
Yes. As an alternative, it can be placed
through dealers like merchant bankers,
brokers, banks, etc.
17. Is there a secondary market for the
CP?
Yes. CP is an actively traded instrument
on the National Stock Exchange. The
Discount and Finance House of India,
Securities Trading Corporation of India,
PNB Gilts, etc. play an important role in
developing the secondary market for CP
by providing liquidity. They act as market
makers and give two way quotes for CP
every day.
18. Can CP be underwritten?
CP cannot be underwritten or co-
accepted.
19. Can credit enhancements be
provided for a CP issue?
Yes. As per RBI circular dated October
10, 2000, banks / FIs can provide credit
enhancements. In view of CP being a
`stand alone’ product, it would not be
obligatory in any manner on the part of
banks and FIs to provide stand-by facility
to the issuers of CP. Banks and FIs
would, however, have the flexibility to
provide for a CP issue, credit
enhancement by way of stand-by
assistance / credit, backstop facility, etc.,
based on their commercial judgement and
as per terms prescribed by them.
However, these should be within the
prudential norms as applicable and
subject to specific approval of the Board.
As per RBI circular dated April 30, 2003,
non-bank entities including corporates are
allowed to provide unconditional and
irrevocable guarantee (credit
enhancement) for CP issue provided:
(i) The issuer fulfils the eligibility criteria
prescribed for issuance of CP
(ii) The guarantor has a credit rating at
least one notch higher than the issuer by
an approved credit rating agency and
(iii) 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.
The banks are allowed to invest in CPs
guaranteed by non-bank entities provided
their exposure remains within the
regulatory ceiling as prescribed by RBI for
unsecured exposures.
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20. Should a company seek RBI 22. What are the factors affecting the
approval before issuing CP? interest rate on CP?
No. The company should satisfy the Some important factors affecting the yield
minimum eligibility requirements for issue on CPs are the quality of credit, as
of CP as notified by RBI from time to time. indicated by the credit rating, liquidity in
The issuing companies have to satisfy the the money market, call money rates,
relevant provisions of the Companies Act, outlook & yield from alternative
1956, Negotiable Instruments Act, 1881, investment, etc.
the Income Tax Act, 1961, etc.
21. Does credit rating affect the yield
23. How much time does the rating
for the issuing corporate?
process take?
Yes. A company with the highest rating
This varies from agency to agency. Credit
(PR1+ in the case of CARE) would
Analysis and Research Limited (CARE) is
normally be able to place CP at a lower
normally in a position to complete CP
rate as compared to an issuer with a
rating assignments within two to three
lower rating, say PR2, though both are
weeks of receipt of essential information.
eligible to access the CP market. Credit
Rating helps to establish a meaningful
relationship between the level of risk and
reward to investors.

(The above information is a compilation from various sources by CARE. The information is
liable to change from time to time. For details please refer to RBI guidelines on
Commercial Paper)
Disclaimer
CARE’s ratings are opinions on credit quality and are not recommendations to buy, sell or
hold any security. CARE has based its ratings on information obtained from sources
believed by it to be accurate and reliable. CARE does not, however, guarantee the
accuracy, adequacy or completeness of any information and is not responsible for any
errors or omissions or for the results obtained from the use of such information. Most
issuers of securities rated by CARE have paid a credit rating fee, based on the amount and
type of securities issued.