Summary and Size of CP

With a view to providing flexibility to participants and add depth and vibrancy to the Commercial Paper (CP) market, the Reserve Bank issued new guidelines for the issue of the paper in October 2000.

Eligibility: Corporates, primary dealers, satellite dealers, and all-India financial institutions are eligible to issue a CP. For a corporate to be eligible, it should have tangible net worth of Rs 4 crore and a sanctioned working capital limit from a bank or a financial institutions and the borrower account is a standard asset.

Rating requirement: The minimum credit rating must be P2 of CRISL or such equivalent rating by other approved agencies.

Maturity: A minimum of 15 days and a maximum up to one year.

Denomination: Minimum of Rs 5 lakh and multiples thereof.

Limits and amount: A CP can be issued as a ‘stand alone’ product. Banks and financial institutions will have the flexibility to fix working capital limits duly taking into account the resource pattern of companies financing including CPs.

Issuing and paying agent (IPA): Only a scheduled bank can act as an IPA.

Investment in CP: A CP may be held by individual banks, corporates, unincorporated bodies, NRIs, and FIIs.

Mode of Issuance: A CP can be issued as a promissory note or in a dematerialized form. Underwriting it not permitted.

Preference for demat: Issuers and subscribers are encouraged to prefer exclusive reliance on demat form. Banks, financial institutions, primary dealers, and satellite dealers are advised to invest only in demat form.

Stand by facility: It is not obligatory for banks or financial institutions to provide stand by facility. They can provide credit enhancement facility within the prudential norms.

The Reserve Bank publishes, on a monthly as well as weekly basis, effective interest rates on CPs issued during a fortnight. The Discount and finance House of India provides the range of weekly bid/offer rates it offers. The DFHI’s turnover fluctuates highly.

The size of the CP market is reflected in the total outstanding amount of commercial papers issued by companies. The outstanding amount of commercial paper increased considerably in the initial years. The amount of commercial paper issued by corporates increased significantly, from Rs 577 crore in March 1993 to a peak of Rs 3,264 crore in March 1994 accompanied by a decline in the average discount rate from 15.5 percent to 11 percent during 1993-94 . But in 1994-95 and !995-96, however the outstanding amount of CP’s declined sharply. This decline was attributed to the withdrawal of the stand-by facility of the paper in October 1994, coupled with rising interest rates and a shrinking of short term surplus with banks.

Since 1996-97 the commercial paper market has picked up as it can be accessed at rates lower than the short term prime lending rates of commercial banks; the easing of liquidity conditions resulted in the renewed interest in commercial paper. The commercial paper market is fast gaining importance as credit off take has dried up. The lack of infrastructural and general economic activity has led to a decline in credit off take. The cut in CRR to the extent of 200 basis points, coupled with a rise in banks deposits, has increased to credit resources with the banks. The CP market has become an attractive avenue for banks to park their credit funds. This market has been rowing at a rate of 12-14 percent, since 2000-01.

CPs have become an attractive source of working capital funds as there are less than the sub-prime lending rates. CP rates in 2000-01 and 2001-02 dipped as low as 7.7 percent from the highest level of 8.25 percent. The lowest PLR rates in 2002 were around 11 percent. Hence, commercial paper proved to be cheaper for corporates.

The CP rates are dependent on ratings a company’s standing and the demand-supply position of the market.

Corporates with the highest rating (P1+ PR1+ A1+) who regularly access the commercial paper market are BPCL, HPCL, IPCL,IOC, ACC, Telco, L&T Tata Coffee, Dabur, IL&FS, M&M Finance, GE Caps, EID Parry, Electro-steel Castings, and Ashok Leyland Ltd.

Nationalized banks invest in CPs as a primary market instrument.