Commercial Paper (CP) is an unsecured money market debt instrument, catering to the short term borrowing requirements of the Corporate. Primary dealers and All India Financial Institutions are also permitted to issue CP.
* This instrument was introduced in 1990 with a view to providing an alternate source of raising short term funds to Corporate and to provide an additional instrument to investors. Subsequently, Primary Dealers and All India Financial Institution were allowed to issue CP for meeting their short term funding to meet their operational requirements.
* There are certain conditions attached to the CP issuance where Corporate require a net worth of at least Rs 4 crore; Company has availed working capital finance either from a Bank or FI; and issuers’ borrowal account must be a standard asset with Banks/FIs.
* Issuance of Commercial Paper would also require obtaining the Credit Rating from rating agencies namely, CRISIL, CARE, ICRA, FITCH or any other credit rating agency specified by RBI from time to time, for the purpose. The minimum credit rating shall be A-2, at the time of issuance, as per rating symbol and definition of SEBI.
* Individuals, Banking Companies, other Corporate bodies, unincorporated bodies, Non-resident Indians (NRIs) and Foreign Portfolio Investors (FPIs) could invest in Commercial Paper. However, investment by FPIs would be subject to limit set by the Regulator.
* The maturity period of a CP could range from 7 days to 12 months but not beyond the validity period of credit rating. It could be issued in denominations of Rs 5 lakhs or multiples thereof.
* A fresh CP issue would remain open for a maximum period of 14 days for subscription. CP is always issued at discount to the face-value. CPs could be issued in physical form in the form of promissory note or in dematerialised form.
* A scheduled Bank has to act as Issuing and Paying Agent (IPA) for Commercial Paper. Since CP is an unsecured instrument, it can’t be underwritten or co-accepted.
* CP could be actively traded in the (OTC) secondary market. Such transactions are to be reported to FIMMDA within 15 minutes of trade for dissemination of information to market participants.
* On maturity, CPs in physical form to be presented to Issuer through IPA for payment whereas those in demat form will be redeemed through depository and receive proceeds through an IPA.
Commercial Paper defaults in India
There was huge demand of the Commercial Papers in Indian Markets prior to the defaults by Non-Banking Finance Companies from September 2018. During the period April to August 2018, CP issuance surged from Rs 1.52 lakh crores to Rs 3.00 lakh crores, which almost halved in October 2018 post defaults. Mutual Funds, key investor group in CP market, also faced the default in getting the payment on due date. The decline in CP issuance was resultant of default by NBFCs, which shook the CP market adversely. Interest rates on CP surged by over 200 basis points during September and October 2018 period.
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