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August 23, 2009
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            Commercial Paper ('CP' for short) is an unsecured money market instrument issued in the form of a promissory note.   It is a privately placed instrument. It was introduced in India, in 1990, with a view to enabling highly rated corporate borrowers to diversify their sources of short term borrowings and to provide an additional instrument to the investors. The primary dealers, satellite dealers and all India financial institutions were also permitted subsequently to issue CP to enable them to meet their short term requirements for their operations.  Reserve Bank of India issued various directions in regard to CP from time to time. Now the Reserve Bank of India issued a master circular incorporating all the existing guidelines/instructions/directives.


            The term 'commercial paper' has not defined by the guidelines. CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by a single investor should not be less than Rs. 5 lakh. The maturity period of CP lies between a minimum of 7 days and a maximum up to one year from the date of issue. The maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.


            CP can be issued by corporates, primary dealers and all Indian financial institutions that have been permitted to raise short term resources under the limit fixed by the Reserve Bank of India. A corporate would be eligible to issue CP provided:

  • The tangible net worth of the company, as per the latest audited balance sheet is not less than Rs.4 crore;
  • Company has been sanctioned working capital limit by bank(s) or all India financial Institution(s); and
  • The borrowal account of the company is classified as a Standard Asset by the financing bank(s)/Institution(s).

    All eligible participants shall obtain the credit rating for issuance of CP. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agents. 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.


                            CP can be issued either in the form of a promissory note or in a dematerialized form through any of the depositories approved by and registered with SEBI. CP will be issued at a discount to face value as may be determined by the issue. No issuer shall have the issue of CP underwritten or co-accepted. The CPs may be held by individuals, banking companies, other corporate bodies, registered or incorporated in India and unincorporated bodies, Non resident Indians and foreign institutional investors.


                CP can be issued a 'stand alone' product.  The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating whichever is lower.  But the banks and FIs will have the flexibility to fix working capital limits duly taking into account the resource pattern of companies financing including CPs. 

                An FIs can issue CP within the overall 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.

                The 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.  It may be issued on a single date or in parts of different dates provided that in the latter case, each CP shall have the same maturity date.


                Every issuer must appoint Issuing and Paying Agent ('IPA' for short) for issuance of CP. Only a scheduled bank can act as an IPA. 

    Responsibilities of IPA:

                The responsibilities of IPA in issuance of CP are as follows:

  • IPA would ensure that the issuer has the minimum credit rating as stipulated by RBI and amount mobilized is within the quantum indicated by the credit rating agency for the specified rating or as approved by its Board of Directors, whichever is lower;
  • IPA has to verify all the documents submitted by the issuer such as board resolution, signature of authorized executants, when CP in physical form and issue a certificate that documents are in order and also to certify that it has a valid agreement with the issuer;
  • IPA is to verify the certified copies of original documents and should be held in the custody of IPA;
  • Every CP should be reported to the Chief General Manager, Financial Markets Department, RBI, Central Office, Fort, Mumbai - 1;
  • IPAs, which are NDS member, should report the details of CP issue on NDS platform within two days from the date of compilation of the issue;
  • IPA will continue to report CP issuance details within three days from the date of completion of the issue, incorporating details as per Schedule II till NDS reporting stabilizes to the satisfaction of RBI.

    Credit Rating Agency:

  • The Code of conduct prescribed by the SEBI for CRAs for undertaking rating of capital market instruments shall be applicable for rating CP;
  • The CRA would have the discretion to determine the validity period of the rating depending upon its perception about the strength of the issuer.  The CRA shall indicate at the time of rating the date when the rating is due for review;
  • While the CRAs can decide the validity period of credit rating, they would have to closely monitor the rating assigned to issuers vis--vis their track record at regular intervals and would be required to make their revision in the ratings public through their publications and website.


                The issuer should disclose to the potential investors its financial position as per the standard market practice. After the exchange of deal confirmation between the investor and the issuer, issuing company shall issue physical certificates to the investor or arrange for crediting the CPs to the investor's account with a depository. Investors shall be given a copy of IPA certificate to the effect that the issuer has a valid agreement with the IPA and the documents are in order.

    Documentation Procedure:

                Fixed Income Money Market and Derivatives Association of India may prescribe, in consultation with the RBI, for operational flexibility and smooth functioning of CP market, any standarised procedure and documentation that are to be followed by the participants, in consonance with the international best practices. 


                The initial investor in CP shall pay the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA. On maturity of CP, when CP is held in physical form, the holder of CP shall present the instrument for payment to the issuer through IPA. If CP is in demat form, the holder of CP will have to get it redeemed through the depository and receive payment from the IPA.

                            If any default is there the IPAs are to immediately report to the Reserve Bank of India full particulars of defaults in repayment of CPs.


                CP is a 'stand alone' product. Therefore it would not obligatory in any manner on the part of the banks and financial institutions to provide stand-by facility to the issuers of CP. Banks and financial institutions have, however, the flexibility to provide for a CP issue, credit enhancement by way of stand-by assistance/credit, back-stop facility etc., based on their commercial judgment, subject to prudential norms as applicable and with specific approval of their Boards. Non banking entities including corporates may also provide unconditional and irrevocable guarantee for credit enhancement for CP issued provided:

  • The issuer fulfils the eligibility criteria prescribed for issuance of CP;
  • The guarantor has a credit rating at least one notch higher than the issuer given by an approved credit rating agency; and
  • The other document for CP properly discloses the net worth of the guarantor company, the name 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 the guarantee will be invoked.



    By: Mr.M. GOVINDARAJAN - August 23, 2009


    Discussions to this article


    Any idea how these credit rating agencies work and what are their charges for getting rating done for an SME pvt ltd co with turnover of around Rs 30 crore and net worth of around Rs 5 crore, for the purposes of CP funding.

    By: Vijay Goel
    Dated: 24/08/2009


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