Commercial Paper (CP) is an unsecured, money market instrument issued under section 45 W of the RBI Act. The corporates including Non-Banking Financial Companies and All India Financial Institutions (AIFIs) are eligible to issue Commercial Papers. Besides, other entities like co-operative societies/unions, government entities, trusts, limited liability partnerships, and other body corporates having a presence in India with a net worth of Rs.100 crore or higher or any other entity specifically permitted by the Reserve Bank are also eligible to issue Commercial papers. The condition for eligibility to issue CP is that any fund-based facility availed of from Bank/s and or financial institutions should be classified as a ‘standard asset’ by the financiers. The offer document for CP shall disclose the exact end use of the money borrowed.
Eligible Investors:
All resident Indians and non-resident Indians (NRIs) permitted to invest in CP under the FEMA Act 1999 are eligible to invest in CPs. No person can invest in CPs issued by related parties either in the primary or secondary market. The investment by FIIs would be within the limits set for them by the Securities and Exchange Board of India (SEBI) from time to time.
Form of CP instrument
A commercial paper shall be issued as a stand-alone instrument in the form of a promissory note and it should be held in a dematerialized form in any of the depositories registered and approved by SEBI. The original tenure of CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue, under the umbrella limit fixed by RBI. The maturity date of CP issued shall be within the date up to which the credit rating is issued by the credit rating agency.
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. The financial institutions can issue CP within the overall umbrella limit prescribed in the Master Circular on Resource Raising Norms for FIs, issued by DBOD of RBI and updated from time to time.
The entity that proposes to issue commercial paper shall obtain the credit rating from one of the Credit Rating Agencies. [As per rating symbol and definition prescribed by the Securities and Exchange Board of India (SEBI)].In the cases of total CP issuance during a calendar year is Rs.1000 crore or more, the issuer shall obtain a credit rating from at least two credit rating agencies like CRISIL, ICRA, CARE, FITCH, etc. registered with SEBI. This new rule is effective from October 01, 2017. When the issuers get two different ratings, they should adopt the lower of two ratings, and in the case of both ratings are the same, the issuance limit shall be lower of the two amounts for which ratings are obtained. The minimum credit rating shall be an A-3 rating, as per the rating symbol and definition prescribed by the Securities and Exchange Board of India (SEBI)].symbol prescribed by SEBI.
On January 3, 2024, RBI REVISES NORMS FOR ISSUANCE OF COMMERCIAL PAPERS(CP) click here to know the latest changes:
Secondary market trading of CP:
OTC trades in a CP shall be settled through the clearing corporation of any recognized stock exchange or any other mechanism approved by RBI. Options (call/put) are not permitted on a CP. All OTC trades in CP shall be reported within 15 minutes of the trade to the Financial Market Trade Reporting and Confirmation Platform (“F-TRAC”) of Clearcorp Dealing System (India) Ltd. The settlement cycle for OTC trades in CP shall be T+0 or T+1.
Buy Back of CP
The issuer may buy back the CPs in full or partly issued by them after 30 days from the date of issue, to extinguish their liabilities. However such buyback offers shall be extended to all investors on identical terms and the buyback shall be at the prevailing market rate.
Other modalities:
The CP should be raised within two weeks from the date on which the issue for subscription is opened. It will be issued at a discount to the face value of minimum Rs.5 lakh or multiples thereof. The face value of the CP to be issued is decided by the issuer. The underwritten or co-accepted CP cannot be issued. Issuers, investors, and Issuing and Paying Agents (IPAs) shall follow the standard procedures and documentation prescribed by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) as ‘Operational Guidelines on CPs’. Scheduled banks can only act as Issuing and Paying Agent (IPA) for the issuance of CP. Every CP issue should be reported to RBI, Financial Market Department, Central Office, Mumbai.
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