Guidelines for Issues of Commercial papers in India

Guidelines for Issue of Commercial
Paper (CP) as amended up to June 30, 2007

Introduction
Commercial Paper (CP) is an unsecured money market instrument issued in
the form of a promissory note. CP, as a privately placed instrument, 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. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.

Who can Issue Commercial Paper (CP)

2. Corporates, primary dealers (PDs) and the all-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India are eligible to issue CP.
3. A corporate would be eligible to issue CP provided: (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore; (b)company has been sanctioned working capital limit by bank/s or all-India financial
institution/s; and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

Rating Requirement
4. All eligible participants shall obtain the credit rating for issuance of Commercial Paper from either the Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agencies as may be specified by the Reserve Bank of India from time to time, for the purpose. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. 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.

Maturity

5. CP can be issued for maturities 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.
Denominations

6. 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 (face value).
Limits and the Amount of Issue of CP

7. CP can be issued as 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. Banks and FIs will, however, have the flexibility to fix working capital limits duly
taking into account the resource pattern of companies’ financing including CPs.

8. An FI can issue CP within the overall umbrella 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.

9. 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. 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.

10. Every issue of CP, including renewal, should be treated as a fresh issue.

Who can Act as Issuing and Paying Agent (IPA)

11. Only a scheduled bank can act as an IPA for issuance of CP.
Investment in CP

12. CP may be issued to and held by individuals, banking companies, other corporate
bodies registered or incorporated in India and unincorporated bodies, Non-Resident
Indians (NRIs) and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India (SEBI).

Mode of Issuance

13. CP can be issued either in the form of a promissory note (Schedule I) or in a
dematerialised form through any of the depositories approved by and registered with
SEBI.

14. CP will be issued at a discount to face value as may be determined by the issuer.

15. No issuer shall have the issue of CP underwritten or co-accepted.
Preference for Dematerialisation

16. While option is available to both issuers and subscribers to issue/hold CP in
dematerialised or physical form, issuers and subscribers are encouraged to prefer
exclusive reliance on dematerialised form of issue/holding. However, with effect from
June 30, 2001, banks, FIs and PDs are required to make fresh investments and hold
CP only in dematerialised form.

Payment of CP

17. 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 the IPA. However, when CP is held in demat form, the holder of CP will have to get it redeemed through the depository and receive payment from the IPA.

Stand-by Facility

18. In view of CP being a 'stand alone' product, it would not be obligatory in any
manner on the part of the banks and FIs to provide stand-by facility to the issuers of CP. Banks and FIs 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 judgement, subject to prudential norms as applicable and with
specific approval of their Boards.

19. Non-bank entities including corporates may also provide unconditional and
irrevocable guarantee for credit enhancement for CP issue provided:
(i) the issuer fulfils the eligibility criteria prescribed for issuance of CP;
(ii) the guarantor has a credit rating at least one notch higher than the issuer given by an approved credit rating agency; and
(iii) the offer document for CP properly discloses the net worth of the guarantor
company, the names 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 which the guarantee will be invoked.
Procedure for Issuance

20. Every issuer must appoint an IPA for issuance of CP. 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 CP 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 documents are in order (Schedule III).
Role and Responsibilities

21. The role and responsibilities of issuer, issuing and paying agent (IPA) and
credit rating agency (CRA) are set out below:

(a) Issuer
With the simplification in the procedures for CP issuance, issuers would now
have more flexibility. Issuers would, however, have to ensure that the guidelines and
procedures laid down for CP issuance are strictly adhered to.

(b) Issuing and Paying Agent (IPA)
(i) IPA would ensure that issuer has the minimum credit rating as stipulated by
RBI and amount mobilised through issuance of CP is within the quantum
indicated by CRA for the specified rating or as approved by its Board of
Directors, whichever is lower.
(ii) IPA has to verify all the documents submitted by the issuer, viz., copy of board
resolution, signatures of authorised executants (when CP in physical form) and
issue a certificate that documents are in order. It should also certify that it has
a valid agreement with the issuer (Schedule III).
(iii) Certified copies of original documents verified by the IPA should be held in the
custody of IPA.
(iv) Every CP issue should be reported to the Chief General Manager, Financial
Markets Department (FMD), Reserve Bank of India, Central Office, Fort,
Mumbai-400001.
(v) IPAs, which are NDS member, should report the details of CP issue on NDS
platform within two days from the date of completion of the issue.
(vi) Further, all scheduled banks, acting as an IPA, will continue to report CP
issuance details as hitherto within three days from the date of completion of
the issue, incorporating details as per Schedule II till NDS reporting stabilises
to the satisfaction of RBI.

(c) Credit Rating Agency (CRA)
(i) Code of Conduct prescribed by the SEBI for CRAs for undertaking rating of
capital market instruments shall be applicable to them (CRAs) for rating CP.
(ii) Further, the credit rating agency would henceforth have the discretion to
determine the validity period of the rating depending upon its perception about
the strength of the issuer. Accordingly, CRA shall at the time of rating, clearly
indicate the date when the rating is due for review.
(iii) While the CRAs can decide the validity period of credit rating, they would have
to closely monitor the rating assigned to issuers vis-a-vis their track record at
regular intervals and would be required to make their revision in the ratings
public through their publications and website.

Documentation Procedure

22. Fixed Income Money Market and Derivatives Association of India (FIMMDA)
may prescribe, in consultation with the RBI, for operational flexibility and smooth
functioning of CP market, any standardised procedure and documentation that are to
be followed by the participants, in consonance with the international best practices.
Issuer/IPAs may refer to the detailed guidelines issued by FIMMDA in this regard on
July 5, 2001.

23. Violation of these guidelines will attract penalties and may also include
debarring of the entity from the CP market.

Defaults in CP market
24. In order to monitor defaults in redemption of CP, scheduled banks which act as
IPAs, are advised to immediately report, on occurrence, full particulars of defaults in repayment of CPs to the Financial Markets Department, Reserve Bank of India,
Central Office, Fort, Mumbai-400001, in the format as given in Annex I.

Source: Master circular of RBI dated 2nd July 2007