Good Morning Ishan: COMMERCIAL PAPER

Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of large institutional buyers. Banks, corporations and foreign governments commonly use this type of funding. 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 investors

Features

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.
An unsecured and unregistered short-term obligation issued by an institutional borrower to investors who have temporarily idle cash.
Short-term, unsecured, discounted, and negotiable notes sold by one company to another in order to satisfy immediate cash needs.
CPs are issued by companies in the form of usance promissory note, redeemable at par to the holder on maturity.
The tangible net worth of the issuing company should be not less than Rs.4 crores.
Working capital (fund based) limit of the company should not be less than Rs.4 crores.
Credit rating should be at least equivalent of P2/A2/PP2/Ind.D.2 or higher from any approved rating agencies and should be more than 2 months old on the date of issue of CP.
Corporate are allowed to issue CP up to 100% of their fund based working capital limits.
It is issued at a discount to face value.
CP attracts stamp duty.
CP can be issued for maturities between 15 days and less than one year from the date of issue.
CP may be issued in the multiples of Rs.5 lakh.
No prior approval of RBI is needed to issue CP and underwriting the issue is not mandatory.

ISSUER OF COMMERCIAL PAPER:

1. Corporate,

2. primary dealers (PDs)

3. All-India Financial Institutions (FIs) are eligible to issue CP.

ELIGIBILITY CRITERIA FOR ISSUING COMMERCIAL PAPER:

A corporate would be eligible to issue CP provided –

1. the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore.

2. company has been sanctioned working capital o 4 Cr limit by banks or all-India financial institutions

3. The borrower account of the company is classified as a Standard Asset by the financing banks/ institutions.

Limits of 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.

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 CP issue needs to be reported to RBI through the Issuing and Paying Agent. CP is issued at a discount to the face value.

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

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.

Customers of CP;-

1. CP may be issued to and held by individuals,

2. banking companies,

3. other corporate bodies registered

4. incorporated in India and unincorporated bodies,

5. non-resident Indians (NRIs) and

6. Foreign Institutional Investors (FIIs).

Factors affecting the interest rate on CP

1. quality of credit, as indicated by the credit rating,

2. liquidity in the money market,

3. call money rates,

4. outlook &