What is Commercial Paper and FAQs

Commercial paper, or CP, is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year. It is an unsecured money market instrument issued in the form of a promissory note and was introduced in India in 1990. Corporates which enjoy a high rating can diversify their sources of short term borrowings using CPs. Investors get an additional instrument. It is typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations, such as funding for a new project

Standard procedures and documentation prescribed by FIMMDA in line with RBI’s Direction No. FMRD.DIRD.2/14.01.002/2017-18 dt August 10, 2017 has laid down the operational guidelines for CP and further, SEBI has issued a Circular on 22^nd  October, 2019 providing for the framework for listing of CPs for trading in stock exchanges with a view to broadening investor participation in CPs. Accordingly, to enable listing of CPs and to ensure investor protection, it is important that issuers make appropriate disclosures at the time of listing and on a continuous basis.

1. Who can Issue Commercial Paper?

– Companies

– Non-Banking Finance Companies (NBFCs)

– All India Financial Institutions (AIFIs)

– Other entities with a net worth of Rs. 100 Crore or higher viz.

– Co-operative societies / Unions

– Government entities

– Trusts

– Limited Liability Partnerships

– Any other body corporate having presence in India

– Any other entity specifically permitted by the Reserve Bank of India (RBI)

2. Which are the conditions to be fulfilled to issue Commercial Paper?

– All fund based facility(ies) availed of from bank(s) and/or financial institutions should be classified as standard asset by the financing banks/institutions at the time of issue.

– Issuers who have defaulted on a Commercial paper shall not be allowed to access the CP market for six months from the date of repayment of the defaulted obligation.

3. Who can invest in Commercial Paper?

– All residents can invest in Commercial papers.

4. Whether Non- Resident can invest in Commercial Paper?

– Non-residents are permitted to invest in Commercial papers under Foreign Exchange Management Act, 1999.

5. Whether Related Parties can invest in Commercial Paper?

– Investments by related parties as defined in sec 2(76) of Companies Act, 2013 are not allowed either in the primary or secondary market.

6. Appointment of IPA and who can act as Issuing and Paying Agent (IPA)?

– The issuer shall appoint an IPA for the issuance of CP and enter into an IPA Agreement

– Any scheduled bank can act as an IPA

– IPA should have Demat account – ‘CP Securities Account’ and an exclusive ‘CP Funds Account’ for each issuer.

7. At which price Commercial Paper can be issued ?

– Commercial Paper shall be issued at a discount to face value.

8. What shall be the maturity period of Commercial Paper?

– The CP can be issued for a period not less than 7 days and not exceeding 365 days from the date of issue.

9. What shall be the denominations of Commercial Paper?

– Minimum denomination/marketable lot for CP will be Rs.5 lac, and multiples thereof. 

10. Whether a Commercial Paper can be issued at different dates by the same issuer?

– A Commercial Paper can be issued on different dates in parts provided that in such case each CP shall have the same maturity date. Every issue of CP, including renewal, shall be treated as a fresh issue.

11. Can an entity make a public issue of Commercial Papers?

– All the CPs must be issued by way of private placements only.

– The amounts sought to be raised under the CP should be within the limits approved by Board of directors of the issuer or within the ceiling stipulated by Credit Rating Agency whichever is lower.

12. What to do if more than one credit rating has received ?

– If the CP issue has been rated by more than one rating Agency: (i) Where the ratings are different, the lower of the two ratings along with the amount specified against the rating should be adopted. (ii) Where the ratings are the same but the amounts are different, the rating with the lower amount should be adopted.

13. Whether the provisions of the Companies Act, 2013 or of SEBI (ILDS) Regulations, 2008 related to private placement of securities shall apply in case of issuance of Commercial Papers?

– CPs are money market instruments and not securities, accordingly the provisions related to private placement of securities shall not apply to issuance of CPs and hence company need not file PAS-3 with the Registrar. The requirements of the provisions under Section 179 or Section 180, as the case may be, pertaining to borrowings shall be applicable.

14. Whether Regulation 29(1)(d) and Regulation 30 of the SEBI (LODR) Regulations, 2015 related to prior and post intimation to stock exchange shall apply in case Commercial Paper issuance?

– Listed companies are required to give prior and post intimation to stock exchange of fund raising through rights issue, preferential issue etc. Therefore, raising of funds by way of similar methods should only be taken into consideration. Accordingly, term loans, CPs, cash credit limit or any other working capital facility should not be included for the purpose of intimation under the said Regulations.

15. What are the reporting requirements related to issuance of Commercial Papers?

– The issuer, through its IPA, shall report the details of issuance and buy back of CPs as well as any instances of default on the F- TRAC Platform by close of the business hours of the same day i.e. the date of issuance/ buyback/ default as the case may be. The IPA will also report the delay (technical delay-RTGS/NEFT/Market Disruption) in funding the CP Funds Account for redemption on maturity date. 

16. What is F- TRAC? 

– “F-TRAC” stands for FIMMDA Trade Reporting and Confirmation System. 

17. Whether appointment of trustee is required in case of Commercial Paper issue?

– If a Commercial Paper is supported by a standby assistance/backstop facility/irrevocable guarantee, the issuer must appoint an independent trustee 

18. What is FIMMDA and its Role ? 

– FIMMDA prescribes for the standard procedures and documentation for issuance of CP which are required to be followed by the issuers, investors and the IPA. 

19. Which all agencies are involved in a CP issue?

– Issuing and Paying Agent;

– Depository;

– Registrar and Transfer Agent;

– Credit Rating Agency;

– Independent trustee when the CP issue is supported by credit enhancement

 20. Whether the Stamp Duty is applicable on a CP issue? 

– CPs are liable for stamp duty as applicable to Usance Promissory Note (UPN) being the lowest maturity among all unsecured debt products. The stamping of the UPN would be as per the Indian Stamp Act, 1899.

21. Can there be redemption of CP? 

– CPs are redeemed on maturity date through IPA who makes the redemption payment to the investors. Maturity date is the final date of payment of redemption amount and no grace period is allowed for the same. Redemption date of a CP should be a Mumbai business day.

22. Can there be Buy Back of CP ?

– As provided in the Directions, :

a) The buyback of a CP, in full or part shall be at the prevailing market price.

b) The buyback offer should be extended to all investors in the CP issue. The terms of the buyback should be identical for all investors in the issue.

c) The buyback offer may not be made before 30 days from the date of issue.

d) The issuer shall inform the buyback to the IPA on the same day and the IPA will instruct the Registrar and Transfer Agent to extinguish the CP (which have been transferred to the issuer’s demat account as per BENPOS report) and also publish the same on F-TRAC platform on the same day.

23. Whether the CP can be underwritten during the issue ? 

– No, CP issue cannot be underwritten or co-accepted.

24. Whether the purpose to be disclosed for issue of CP ? 

– The exact purpose shall be disclosed in the offer document at the time of issue of CP. (The purpose will have to be exact eg:.For meeting Stock in trade/Receivables , Repairs, Admin expenses, Salaries, Creation of an asset, Bridge Finance for ……. etc. and NOT as general Corporate purposes).

25. Whether the Call and put option allowed on CP ? 

– Options (call/put) are not permitted under CP, but Buyback of CPs is permitted, subject to conditions.

26. Is it compulsory to issue CP in Demat form ? 

– CP shall be issued in the form of a promissory note and held in a dematerialized form through any of the depositories approved by and registered with SEBI.

27. Can CP be listed and is it mandatory to list the CP ? 

– Yes, CP can be listed , further as per the SEBI circular no. SEBI/HO/IMD/DF2/CIR/P/2019/104 dated October 01, 2019, listing of CPs is mandatory for those CP Issuers seeking investments from Mutual Funds.

28. What are the listing compliance to be complied ? 

– An issuer who desires to list its CP shall forward an application for listing along with the disclosures to the concerned stock exchange(s) as per SEBI Circular No. SEBI/HO/DDHS/DDHS/CIR/P/2019/115 dated 22^nd October 2019.

– On approval of the listing application by the concerned stock exchange(s), the disclosures so provided along with the application for listing, shall be made available on the website of the concerned stock exchange(s).

– Post listing, the issuer shall make disclosures, during the tenure of the CP(s) to the concerned stock exchange(s), which in turn shall disseminate the same on its website.

29. Those companies whose CP are listed are they called as Listed Company ? 

– Section 2 (52) of the Companies Act 2013, defines “listed company” means a company which has any of its securities listed on any recognised stock exchange. Further as per Section 2(h) of the Securities Contracts (Regulation) Act, 1956,“Securities”, include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.

– Now the question arise is whether the CP are marketable securities or not? The definition provided of CP in the Directions by RBI dated 05^th October 2017, defines CP is a money market instrument issued in the form of a promissory note and transferable by way of negotiation.

Disclaimer : The views presented are in personal & in generic form and not as a legal advice, further it has nothing to do with where I am rendering my professional services. Users of this information are expected to refer to the relevant existing provisions of the applicable laws.

Author: CS Kavita Shah, is Practicing Company Secretary from Mumbai and can be contacted at : csshahkavita@gmail.com