Wednesday, January 9, 2013

New Guidelines for Issue of Commercial Paper (CP)

The RBI issued some guidelines on issue of Commercial Paper on 01.01.2013. Some of its salient features are:

Eligibility for issue of CP: Companies, PDs and FIs are permitted to raise short term resources through CP within the umbrella limits.
A company would be eligible to issue CP if it meets the following criteria:
1.       Tangible net worth as per the latest audited balance sheet is not less than Rs. 4 crore;
2.       Has been sanctioned working capital limit by banks or FIs; and
3.       The borrower account of the company is classified as a Standard Asset by the financing bank/ institution.          

Issue of CP – Credit enhancement, limits, etc.
·         CP shall be issued as a ‘stand-alone’ product. Further, 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 may, based on their commercial judgment, subject to the prudential norms as applicable to them, with the specific approval of their respective Boards, choose to provide stand-by assistance/ credit, back-stop facility etc. by way of credit enhancement for a CP issue.
·         Non-bank entities (including corporates) may provide unconditional and irrevocable guarantee for credit enhancement for CP issue, provided: 
1.       the issuer fulfills the eligibility criteria prescribed for issuance of CP;
2.       the guarantor has a credit rating at least one notch higher than the issuer given by an approved CRA; and
3.       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. 
4.       The aggregate amount of CP that can be issued by an issuer shall at all times be within the limit as approved by its Board of Directors or the quantum indicated by the CRA for the specified rating, whichever is lower. 
5.       Banks and FIs shall have the flexibility to fix working capital limits, duly taking into account the resource pattern of company’s financing, including CP. 
6.       An issue of CP by an FI shall be within the overall umbrella limit prescribed in the Master Circular on Resource Raising Norms for FIs, issued by the Reserve Bank of India, Department of Banking Operations and Development, as prescribed/updated from time-to-time.
7.       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. 
8.       Every issue of CP, and every renewal of a CP, shall be treated as a fresh issue.

Form of the Instrument, mode of issuance and redemption

1.       CP shall be issued in the form of a promissory note (as specified in Schedule I to these Directions) and held in physical form or in a dematerialized form through any of the depositories approved by and registered with SEBI, provided that all RBI regulated entities can  deal in and hold CP only in dematerialized form through such depositories.
2.       Fresh investments by all RBI-regulated entities shall be only in dematerialized form.
3.       CP shall be issued in denominations of 5 lakh and multiples thereof. The amount invested by a single investor should not be less than 5 lakh (face value).
4.       CP shall be issued at a discount to face value as may be determined by the issuer.
5.       No issuer shall have the issue of CP underwritten or co-accepted.
6.       Options (call/put) are not permitted on CP.

1.       CP shall be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue. 
2.       The maturity date of the CP shall not go beyond the date up to which the credit rating of the issuer is valid.

Procedure for Issuance
1.       Every issuer must appoint an IPA for issuance of CP.
2.       The issuer should disclose to the potential investors, its latest financial position as per the standard market practice.
3.       After the exchange of confirmation of the deal between the investor and the issuer, the issuer shall arrange for crediting the CP to the Demat account of the investor with the depository through the IPA.
4.       The issuer shall give to the investor a copy of IPA certificate to the effect that the issuer has a valid agreement with the IPA and documents are in order (Schedule II).

Rating Requirement
Eligible issuers shall obtain credit rating for issuance of CP from any one of the SEBI registered CRAs. The minimum credit rating shall be ‘A3’ as per rating symbol and definition prescribed by SEBI. The issuers shall ensure at the time of issuance of the CP that the rating so obtained is current and has not fallen due for review.