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Commercial Paper in money market

Commercial Paper in money market

Edited on 11.08.2017

Commercial Paper (CP) is an unsecured, money market instrumment issued under section 45 W of 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 presence in India with 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, Non-Resident Indians (NRIs) permitted to invest in CP under FEMA Act 1999 are eligible to invest in CPs.No person can invest in CPs issued by  related parties either in primary or secondary market. The investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time.
Form of CP instrument
A commercial paper shall be issued as stand alone instrument in the form of promissory note and it should be held in a dematerialized from 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 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 credit rating issued by the credit rating agency.
Rating requirements:
In the cases of total CP issuance during a calendar year is Rs.1000 crore or more, the issuer shall obtain credit rating from atleast 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 rating, they should adopt the lower of two ratings and in the case of both ratings are same, the issuance limit shall be lower of the two amounts for which ratings are obtained.  The minimum credit rating shall be A-3 rating symbol prescribed by SEBI.

Secondry 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 part issued by them after 30 days from the date of issue, for the purpose of extinguishing 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 issue for subscription is opened. It will be issued at a discount to face value of minimum Rs.5 lakh or multiple 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 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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