COMMERCIAL PAPER

CHAPTER 1
1.1 INTRODUCTION
Commercial paper is a short-term unsecured promissory note issued by corporations and foreign governments for many large, creditworthy issuers. Commercial paper is a low-cost alternative to bank loans. Issuers are able to efficiently raise large amounts of funds quickly and without expensive Securities and Exchange Commission (SEC) registration by selling paper, either directly or through independent dealers, to a large and varied pool of institutional buyers. Competitive, market-determined yields in notes, whose maturity and amounts can be tailored to specific needs, can be earned by investors in commercial paper. Commercial paper has become one of Americas most important debt markets, because of the advantages of commercial paper for both investors and issuers. Commercial paper outstanding grew at an annual rate of 14 percent from 1970 to 1991. Commercial paper totaled $528 billion at the end of 1991. This chapter describes some of the important features of the commercial paper market. The first section reviews the characteristics of commercial paper. The second section describes the major participants in the market, including the issuers, investors, and dealers. The third section discusses the risks faced by investors in the commercial paper market along with the mechanisms that are used to control these risks. The fourth section discusses some recent innovations, including asset-backed commercial paper, the use of swaps in commercial paper financing strategies, and the international commercial paper markets. The money market is relevant to the corporate world in terms of short-term surplus or deficit of funds, which it experience. If a corporate has a shortterm surplus, it invests and if it faces deficit, then it borrows. A corporate needs short-term funds to manage its working capital requirements, pay taxes and meet other short-term commitments. These needs are fulfilled, usually, by obtaining short term finance from banks, trade credit from creditors, loans from inter corporate deposits (ICDSs) market, bill discounting and factoring, etc. corporates are always in search of new instruments to raise funds that provides them with an optimal combination of

COMMERCIAL PAPER

low cost, flexible and desired maturity. One such instrument allowed by RBI in early 90s is the COMMERCIAL PAPER

1.2 DEFINITION
Commercial paper is a short term, unsecured license promissory note issued at a discount to face value by well known or reputed companies, who carry a high credit rating and have a strong financial background. It is an unsecured obligation issued by a bank or corporation to finance its shortterm credit requirements like accounts receivable and inventories and it is usually issued at a discount reflecting the prevailing market interest rates. An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates. Investopedia explains 'Commercial Paper Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement.

COMMERCIAL PAPER

1.3 Participants
1. Issuers Any private sector companies, public sector units, non-banking companies, primary dealers (PD), satellite dealers (SDs) etc, can raise funds through the Commercial papers. But the companies have to satisfy the eligibility criteria prescribed by RBI as discussed later. The condition laid by RBI restrict the entry of issuers into the CP market. 2. Investors CPs are generally open to all investors-individuals, banks, corporates and also Non-resident Indians (NRIs). But NRIs can only invest on a nonreportable and non transferable basis. SEBI has permitted Foreign Institutional Investors (FIIs) also to invest in corporate debts instruments like CPs. FIIs were allowed to invest their short-term funds in such instruments too. Within a ceiling of the $ 1.5 billions of the total FIIs were inflows for debt funds set down by the RBI. Though the market is open to the above segments, usually, banks, large corporate bodies, public sector units with investible funds functions in the market.

Source :- (http://www.indianmoney.com/)

COMMERCIAL PAPER

CHAPTER 2
COMMERCIAL PAPER 2.1 FEATURES
Commercial papers favor both borrowers and investors. It is considered as an optimal combination of liquidity and returns in the short-term market. To borrowers it implies low cost of funds, and to investors it implies liquidity, marketability and returns. I) Commercial papers does not originate from a specific self liquidating transaction like normal commercial bills, which generally arise out of specific trade transaction. CPs is backed by the liquidity and earning powers of the issuer, but is not backed by any assets, and hence they are unsecured. The CP market provides the borrower a cheaper source of funds with less paper work and formalities when compared to bank finance. Corporate prefer this mode of finance as they can determine the cost and maturity. Similarly, CP involves less paper work formalities, as it an unsecured liability, unlike bank finance, which is secured. Investors prefer to invest in CPs due to high liquidity, varied maturity and high yield (when compared to bank deposits). The liquidity is high because it can be transferred by endorsement and delivery.

II) III)

IV)

1. MATURITY Commercial paper has a minimum maturity period of 15 days and a maximum of 1 year. Unlike CD, the issuer can buy back his CP. 2. DENOMINATION AND SIZE CPs are issued in multiples of Rs.5 lakh and the minimum, size of each issue is Rs.5 lakh as minimum investment.

COMMERCIAL PAPER

3. ISSUE PRICE The CPs are issued to the investors at a discount to the face value. The discount actually is the effective interest rate. The issue prices determine by the corporate issuing it in the following manner. Generally the merchant bankers (Issuing and Paying Agent) IPA on behalf of the corporate client, approaches various investors and takes quotes, and expected amount of investment for the proposed CP for various maturity. After obtaining the quotas, the merchant bankers and issuing company compile the data and arrive at an optimal discount rate with a feasible maturity date of paper. While determining the discount rate, it considers factors such s prevailing call money rates, prime lending rates, T-bill rates, maturity of the papers and other relevant expenses (such as brokerage, rating agencys fees, stamp duty, etc). Once the issue price and maturity are decided, the IPA places the CP with the investors.

2.2 FACTORS AFFECTING PRICING

CP being a short term instrument, its primary and secondary markets determination of the interest rates, i.e.; the discount rates, depends upon condition in short-term money market. The following are the principle factors in pricing the CPs. 1. INTERBANK CALL RATES Since call rates affect all the other short-term rates and banks are the most important investors in CPs, its pricing is affected very much by call rates. Also, as the lenders in the CPs market are predominantly bank, call market affects the CP market rates; lower call rates means cash surplus. Banks thus view CPs as an alternative investment route. 2. COMPETING MONEY MARKET INVESTMENT PRODUCTS Interests rate son CPs are determine by the demand and supply factors in the money market and the interest rates on the other competing money market instrument such as Certificate of Deposits, Commercial Bills, Short term Forward premium and Treasury Bills, the investment in CPs give

COMMERCIAL PAPER

comparably higher yield than those obtained in banks deposits of similar maturity. 3. LIQUIDITY Pricing and availability of funds under CPs are determined by the liquidity amongst banks and mutual funds, which are the principle investors. 4. CREDIT RATING Most of the secondary markets investments in CPs are done only in P1 (highest CRISIL, rating for short term credit instrument). However, two P1 + companies may not attract the same rate, due to relative credit perception by the public and also, to an extent, the companys long term credit ratings.

2.3 RATING NOTCHES FOR CPs

The 5-notch scale on which the credit rating agencies rate the CPs is given below: P1: P2: P3: The degree of safety regarding timely payment is strong The degree of safety is strong, but relatively lower than that of P1. An adequate degree of safety regarding timely payment; but the adverse affects due to the unforeseen circumstances will have more impact on the instrument than on the instrument rated as P1 and P2. :The degree of safety regarding timely payment on the instrument is minimal and the effect of unfavorable conditions may be adverse. The instrument is expected to b in default on maturity or is in default.

P4 P5:

By adding + and -symbols after the rating, it is further fine tuned

COMMERCIAL PAPER

2.4 TYPES OF PAPERS

Commercial Papers can be issued either directly or through a dealer. If the company issues the paper directly to the investors without dealing with an intermediary, it is referred to as direct papers. The companies going for direct paper will announce the current rates of CPs with various maturities so that the investors can choose the CPs with various maturities so that the investors can choose the CPs based on the requirement. If a CP is issued by an intermediary (i.e.; dealer/merchant banker) on behalf of its corporate client, it is known as dealer paper. The role of dealer in the CP market is to arrange for the private placement of the instrument. Generally, dealers also play advisory roles in timing the issue, determining discount rate and appropriate maturity period. In India, the CPs is usually placed with the investors with the help of issuing and paying agent. Market making in CPs has not reached the desirable levels. However, it is possible for any dealers to [pick up the entire issue of CP of a company and then sell it in the market.

2.5 ISSUING PROCEDURE

A corporate planning to issue CP requires fulfilling the eligibility criteria prescribed by the RBI, and then it needs to select merchant bankers and an issuing and paying Agent (IPA) (mandatory) and obtain a resolution from the company board to issue the commercial papers. After the resolution is passed, the company needs to get t he CP credit rated by one of the approved credit rating agencies like CRISIL/ICRA/CARE/DCR, as prescribed by RBI. The company then has to approach its principle bankers with a proposal along with a credit rating certificate for approval. The banker will then scrutinize the same and verify whether all condition stipulated by RBI are met, and forward the application to the RBI for intimation.

On the other hand the merchant bankers or issuing or paying agent will locate the clients and get their quotas for different maturity periods as discussed above. Then the company and merchant bankers /IPA decide the maturity, discounts rate and the quantum of the issue. A company can opt a
` 7

COMMERCIAL PAPER

various maturity periods within the stipulated span, i.e, if a company plans to issue a CP for a span of 6 months, it can raise the money in trances with different maturity periods of 1 month, 2 month or 3 months, etc. based on the market quotes. If a company decides on a 2 month CP, it can raise the finance within a period of 2 weeks from the date on which the proposal is taken on record by the bank and it can issue the paper on a single day or in parts on different dates (but the whole issue should be redeemed on the same date). The issue proposed should be completed within a span of two weeks and the company should intimate the bankers to reduce the working capital limit to the extant of the amount raised. The company should pay the applicable stamp duty based on the maturity. After the issue is completed within 3 days, the company should intimate the RBI the actual amount raised through CPs. The CP is not allowed to be underwritten. On the maturity the holder of the cp presents the instrument to the paying agent. Who arranges the payment? The agent will receive the amount and brokerage for the services provided (the brokerage fees charged by them is given below). No grace periods is allowed for the repayment of the paper. If the maturity dates falls on the holidays. The issuer is supposed to make payment on the next working day, every issuer of CP is treated as a fresh issue (including roll over) and the issuer need intimate RBI while doing so. 1. THE ROLE OF ISSUING AND PAYING AGENT. Generally banks act as a Issuing and Paying Agent (IPA). The role of IPA becomes mandatory while issuing CP. Apart from the above discussed functions, it holds CPs notes, safeguard on behalf of the issuer, delivers the notes to the investors and arrange for redemption on behalf of the corporate client. 2. ISSUE EXPENSES The issue expenses of CP include payment of stamp duty, brokers fees or issuing or paying agent fees, rating agencies fees and other expenses like charges levied by the banks for providing redemption facilities, etc. all the expenses related to the issue of CPs are borne by the issuers. The brokerage varies depending on the size of the issue and the maximum prescribed brokerage is as follows

COMMERCIAL PAPER

Fees charged (% on the issue amount) Period of CP 0.025 3 months 0.050 6 months 0.100 6 months and above

3. STAMP DUTY ON COMMERCIAL PAPER The stamp duty payable by the issuer on CP is based on the period for which the CP/UPN is issued. There is certain concession in stamp duty applicable under Art 12 of Indian stamp act 1899 available to certain class of investors. ( Commercial and cooperative banks and specified FIs like IFCI, IDBI, SFCs ) as per central Government Notification date: 16.05.1976. Where an eligible class of investors is the list subscriber. Then the application stamp duty structure is given below. I) II) III) IV) If the CP is issued for a special upto 3 months- Rs.0.50 per Rs.1,000 or each part thereof of (maturity value). If the CP is for above 3 months upto 6 months-Rs.1.00 per Rs.1,000 or each part thereof (maturity value). If the CP is for above 6 months upto 9 months-Rs.1.50 per Rs.1,000 or each part thereof (maturity value). If the CP is for above 9 months upto 12 months-Rs.2.00 per Rs.1,000 or each part thereof (maturity value).In other class of investors stamp duty applicable would be Rs.1.25, Rs.2.50, Rs.3.75, and Rs.5.00 per Rs.1,000 (maturity value) for respective slab stated above. Every renewal is considered as a fresh issue and it involves expenses.

V)

COMMERCIAL PAPER

Hence, a company needs to optimize between the interest cost and issue cost while deciding the terms of maturity, i.e; if an issue is raised for a long period, the company may have to pay more interest, and if it reused for a short period, it has to incur issue expenses each time. Hence a company must consider interest paid and issue expenses borne while determining the duration of CP. 4. UNDERWRITING AND STANDBY FACILITIES From the beginning, the RBI did not permit underwriting of CPs. However, it allowed banks to sanction standby arrangement to the companies issuing a CP. As the amount raised by CP is utilized to reduce the working capital finance, a company may experience a liquidity crunch when the CP matures. In such instances, banks provide standby facility to redeem the sum at maturity. When such a facility is provided by a bank, the instrument is secured indirectly. The real risk associated with corporates was not assessed properly, as the banks indirectly assured repayment of the CPs to the investors. Hence, RBI attempted to rectify this anomaly by abolishing standby facility in October, 1994, to make the CP market more realistic. 5. SECONDARY MARKET AND TRADING This transaction in secondary market as CPs are generally placed with them. The secondary market transaction does not attract stamp duty. The secondary market transaction does not attract stamp duty. The CP being a discount paper does not attract income tax, but the trading income, which is the difference between the cost of acquisition and resale value, attracts income tax. There are very few markets makers who offer two way quotes in Commercial Papers. For the intermediary market deals, the brokerage charged is in the range of 0.05%-0.20%. 6. SETTLEMENT The transfer is done through endorsement and delivery. On maturity the instrument is presented to the paying agent for receiving payments. The company cannot have any grace period and it is liable to make payments whenever the paper matures. As there is no roll over, every issue of commercial paper including renewal is treated as a new/fresh issue.

10

COMMERCIAL PAPER

7. TAXATION For the corporate: The discount is treated as an interest expense, deductible for tax purpose. For the investors: Profit/loss on sale of investment Income is taxed under the head Profit and losses from business and profession. Losses are allowed as business losses for banks and investments companies. For, corporate that invests in other companys CPs; this would amount to other Income/Interest Incomes.

2.6 MERITS OF COMMERCIAL PAPER

The paper work involved in raising the funds through the Commercial Paper is very less because more funds can be procured without any underlying transaction. The flexibility provided by the instrument enables the company to raise additional funds especially when the market is favorable. The cost of funds for the company is reduced because it can raise 75% of its working capital through the Commercial Paper issue at an interest rate lower then the interest rate of borrowing from the banks. In the cash credit system of lending, the borrowers can reduce the outstanding amounts and when he gets surplus funds. This results in a reduced effective interest cost. The companies, which borrow funds through the issue of CP, can take advantage of a situation by following the money market rates. This is because of the administrative lag in aligning the back lending rates with the overall interest rate. The companys image will be improved casting a positive effect on the long-term borrowing programs of the company. The level of access to the national by banks gives CP market is considered as a key factor to accept the issue in the international market. From the investors point of view, the CPs yields relatively higher returns then a similar maturity banks deposits. Though this security are unsecured, the standby facility its holders confidence to get the return on the due dates. The holder can get quick payments from the companys banker on its behalf as soon as the permissible working capital limit is achieved.

11

COMMERCIAL PAPER
Source :management/) (http://www.mbaknol.com/financial-

CHAPTER 3
EVOLUTION AND DEVELOPMENT OF COMMERCIAL PAPER MARKET 3.1 HISTORY OF COMMERCIAL PAPER
The concept of raising funds through commercial paper is new to Indian corporate. The introduction of CPs is a result of the suggestions of the Working Group on Monday Market in 1987. The working group was of the opinion that the CP market had the advantage of giving high-rated corporate borrowers cheaper funds than they could obtain from banks, while providing the investors higher yields than they could obtain from the banking system. In 1989, the RBI announced its decision to introduce CPs. It was launched with a view to enable highly rated corporate borrowers to diversify their sources of short-term borrowings and also provide an additional instrument to investors, by which certain categories of borrowers could issue CPs in the Indian Money Market. It was also allowed because the RBI desired to discourage the practice of lending in the Inter Corporate Deposit (ICD) market. As ICDs were unsecured and the transactions were not transparent, the RBI felt that CPs may serve as a good substitute for such funds. Initially, RBI issued guidelines on issue of CPs in January, 1990, and these guidelines later were revised many times to facilitate the growth of the market. It was indicated in April, 2000 policy statement that the current guidelines to issue the CPs would be modified in the light of recommendations made by an Internal Group. Accordingly, a draft of the revised guidelines as also the Report of the Internal Group was circulated in July, 2000. Taking into account the suggestions received from the participants, the guidelines have now been finalized. The new guidelines are expected to provide considerable flexibility to participants and add depth and vibrancy to the CP market while at the same time ensuring prudential safeguards and transparency. In particular, the guidelines will enable companies in the services sector to more easily meet their short-term working capital needs. At the same time, banks and FIs will
` 12

COMMERCIAL PAPER

have the flexibility to fix working capital limits duly taking into account the resource pattern of companies finances including CPs. The changes in the guidelines originally issued are summarized hereunder. Earlier, a company was eligible to issue CP only if it had tangible new worth of Rs.10 Crore as per the latest balance sheet. In April, 90, it was reduced to Rs.5 crore and, further to Rs.4 crore in October, 93. Similarly, the working capital requirement limit, which was Rs.25 crore, was reduced to Rs.15 crore and later to Rs.4 crore in October, 93. The minimum credit rating required was A1 and P1 and the same was reduced to A2 and P2 in October, 93. The amount a company was allowed to raise through CP was limited to 20 percent of its Maximum Permissible Bank Finance (MPBF) and the same was raised to 75 percent in October, 93. Since the concept of MPBVF was abolished recently, now a corporate can raise up to 100 percent of its fund-based working capital (without increasing its overall short-term credit). The RBI initially stipulated that the company should be listed on one or more of the stock exchanges. Later, it permitted even unlisted companies to issue CPs. According to the initial guidelines, the maturity period of CP was a minimum of 3 months and a maximum limit was extended to 1 year in October, 1993 and the minimum was reduced to 30 days in 1997. However, in later guidelines, the minimum was further reduced to 15 days. Earlier, the denomination was Rs.10 lakh and the minimum size of an issue to a single investor was Rs.50 lakh (face value). In October, 1993 the minimum amount for a single investor was reduced to Rs.25 lakh in multiples of Rs.5 lakh. At present, it is Rs.5 lakh in multiples of Rs.5 lakh. Earlier, the company which was listed on a stock exchange was eligible to issue a CP; later this condition was relaxed. Similarly, the company willing to raise CP had to take prior approval from the RBI which is not essential now. The standby facility which was allowed to facilitate redemption has now been abolished to activate the market. Though the above conditions were relaxed modified for the growth of CPs, the growth was not as appreciable as expected. The RBI had taken further steps to activate the market for CPs as there were hardly any market makers offering two-way quotes in CPs. The Discount and Finance House of India (DFHI) was expected to be a market maker by giving two-way quotes. The RBI permitted the Primary Dealers (PDs) to raise the funds for their operations by issuing CPs hoping that this would, in

13

COMMERCIAL PAPER

turn, enable the PDs to access greater volumes of funds thereby enhancing the level of activity in the secondary market.

3.2 REASON FOR UNDERDEVELOPMENT

The experts attribute the following reasons for underdevelopment: I) Restricted entry of corporate into this market. The stringent conditions laid down by the RBI have made entry of good but small companies difficult. A company is prompted to issue a CP if the cost of funds is lower than the PLR of the banks, which is usually the rate the top class companies will be obtaining. Since the cost of CP includes rating charges, stamp duty, IPAs fee in addition, to the discount, the effective cost should be lower than the PLR. Otherwise, it will not be prudent for a corporate to issue CP. All these costs have to be incurred each time a company issues a CP thus increasing the effective cost. Hence, a company may not be able to come out with a CP issue if the difference in the effective cost and PLR is marginal. The minimum size of investment for an individual investor is too high, there are no tax benefits. Hence, the individuals and other small investors are away from this market.

II)

III)

3.3 FUTURE OUTLOOK

The RBI is constantly watching the growth of the CP market, and it is modifying/relaxing the guidelines for the enhancement of the same. While doing so, RBI can consider the following measures to facilitate the growth of the market: I) Relax stringent conditions to reduce the overall cost of a CP. For example, the rating fees charged by rating agencies is relatively high, in spite of which RBI insists upon a fresh rating (less than 2 months old) every time a CP is issued; this in turn pushes up the cost of issue to the issuer.

14

COMMERCIAL PAPER

II) Banks were earlier permitted to sanction standby facility to the companies issuing CPs so that upon redemption the working capital limits would be automatically restored.
Source : - (http://www.indianmba.com/)

CHAPTER 4 COMMERCIAL PAPER IN FOREIGN COUNTRIES

4.1 COMMERCIALISATION OF COMMERCIAL PAPER There are no hard and fast rules regarding the means and methods of finance for a corporate; all are meant to keep the wheels of the industry moving. However there are established usages of a means of finance and any remarkable deviation from the erstwhile norms merits discussion. As we all know, a corporate gets working capital limits sanctioned by his banker or consortium of bankers and draws credit as and when required. The cost of this cash credit or overdraft is the banks PLR at the minimum or anything over and above the PLR, depending on the credit rating, fundamentals and negotiating powers of the corporate. The PLR as of now is say, 11.5%.The cost of a CP is much lower, ranging between 7.40 to 9.75%. It makes perfect commercial sense to raise money through CPs, saving approximately 4 percentage points in cost of funds. Though as a matter of policy CPs are not parts of working capital limits, very few corporates get the facility of standalone CPs. According to guidelines, a CP can be issued as standalone product and banks have the flexibility to fix working capital limits taking into account the resource pattern of the companys financing including CPs. However, from the issuers perspective as well, it is better to have a fallback, as market conditions may turn adverse at the time of maturity of the CP. As a matter of trade usage, the investor, particularly the subsequent investor, needs the comfort of fallback on the working capital limits. Optionally, banks may provide standby credit facility, for which they are entitled to charge fees; but corporate would not like to increase the cost of funds. Many issuers issue CPs, perpetually, i.e. with a revolving facility at a maturity. This way, through a short term instrument, the corporate get access to long term funds. If the existing investor is not interested in re-investing,
` 15

COMMERCIAL PAPER

the corporate can get another investor to continue with it. There is a typical set of investors: banks, mutual funds and financial institutions, who invest in CPs. Even if there is a problem in negotiating with the existing or prospective investor, it is a matter of a few days only. The corporate can resort to CC/OD during the interlude. The higher cost of CC/OD would be incurred only for a few days during the negligible period. In this fashion, short term funds can be used for long term purposes. Conventionally, for project financing, a corporate would approach a termlending institution or a bank, which would entail a lot of paraphernalia and higher cost. It is a win-win situation. For the company, it means lower cost of funds. Even if the savings is not 4 percentage points as disclosed above, it is substantial. In this age of competition, it renders the bank able to keep the corporate within the consortium. Though it leads to a asset-liability mismatch, by funding long-term projects through short-term means, the objectives of a corporate are different from those of a bank; the basic objective of a business enterprise is to produce goods and services in the most efficient manner with resources at the lowest cost. In the bargain, the market for CPs is getting expanded; which is beneficial both to the issuer as well as to the investor. The data published by RBI shows a major development in the outstanding CP amount. The rise in volume of CP issuances can be traced to the profile of investors, apart from the advantages discussed above. Now-a-days, the major chunk of inflows in mutual funds is in liquid/money market schemes, income schemes and gilt schemes. A major avenue of investment for mutual funds is commercial papers, apart from call and call-linked instruments, and corporate would be happy to oblige by supplying papers, thereby saving cost vis--vis regular working capital. Banks and financial institutions are happy to invest in CPs even at a lower rate, as there is a dearth of good quality borrowers and it is important to keep them within the consortium. Of late, insurance companies, i.e. LIC and GIC, who are sitting on surplus cash, are investing extensively in CPs.

4.2 COMMERCIAL PAPERS IN OTHER COUNTRIES

The concepts of raising money through Commercial Papers have been known to the US markets since the 18th century. Other nations came to
` 16

COMMERCIAL PAPER

know of it only in the earlier part of the 19th century. The US firms started selling open market paper as a substitute to the customary bank loan that was required for working capital. Commercial Papers (CPs) are defined as short-term, unsecured usance promissory notes issued at a discount to face value with fixed maturity by well-known companies that are financially strong and carry high credit ratings. They are referred by different names such as Industrial Paper, Finance Paper and Corporate Paper depending on the nature of the issuing firm.

4.3 INVESTORS IN COMMERCIAL PAPER

Commercial Paper is the second largest money market instrument in the US, after Repos, surpassing T-bills, with a total value exceeding $ 1.4 trillion, by the end of 1999. American Commercial Paper is rated by one or more credit rating agencies and as such the credit risk on it is perceived to be low, but existent. The liquidity of the instrument is also very low. The CPs are generally issued by the public utilities, bank holding companies, insurance companies, transportation companies, and finance companies. Banks, liquid business concerns, insurance companies, state and local governments and non-banking financial institutions mostly buy CPs. By the end of 1998, the investors in commercial paper were

Investments Companies Insurance Companies Cities, State Governments & Municipal Boards Banks Companies Others TOTAL

47 % 11 % 8% 15 % 3% 16 % 100
4.3.1. PURPOSE

The funds raised by means of CPs by corporate % are used for current transactions such as purchase of inventories, payment of taxes,
` 17

COMMERCIAL PAPER

meeting payrolls and to meet other short-term rather than long-term obligations. 4.3.2. FEATURES CPs are regarded as highly safe, liquid and quality instruments for investment in private sector. I) II) III) They are negotiable by endorsement and delivery. They are generally issued in multiples of $1000 and in denominations designed to meet the needs of the buyer. They are normally issued in a bearer form at a discount to face value. But, the issues of CPs on a fixed interest basis are also seen in the market. CPs are unsecured; and they are backed by the general credit standing of the issuing companies and by the lines of credit they might be in a position to obtain from banks. CPs is considered to be more flexible in terms of maturity, i.e. they can be tailored to the user requirements. The maturity period varies from 1 to 270 days; but, it should not exceed more than 270 days.

IV)

V)

4.3.3 TYPES OF COMMERCIAL PAPER

There are two major types of commercial paper 1. Direct Paper 2. Dealer Paper

1. Direct Paper:

18

COMMERCIAL PAPER

The Direct Paper is issued by large finance companies and bank holding companies deal directly with the investor rather than use a dealer as an intermediary. Though the issuers of direct paper do not have to pay any dealers commission, these companies must operate a marketing division to maintain constant interaction with active investors. And also these companies need to pay fees to banks for supporting lines of credit, to the rating agencies and to agents (i.e. bank trust departments). Hence, this paper must be sold in large volumes to cover the substantial costs of distribution and marketing. 2. Dealer Paper: The Dealer Paper is issued by dealers on behalf of their corporate customers. It is mainly issued by non-financial companies and finance companies. The issuing company sells the paper directly to the dealer at a discount and commission. The dealer will resell it at the highest possible price in the market. Companies using dealers to place their paper are generally smaller, less frequent borrowers than issuers of direct paper. An open rate method is followed by which the company receives some money in advance but the balance depends on the performance of the issue in the open market.

Source : - (http://www.helium.com)

CHAPTER 5
` 19

COMMERCIAL PAPER

COMPUTING RATE OF RETURN ON COMMERCIAL PAPER

The rate of return on a commercial paper is computed by using the following formula in a secondary market transaction:

DR = Par Value Purchase Price * 360 (Par Value) (Days To Maturity)

This could be well understood by the following example

Mr. A purchased a commercial paper of Maxwell Inc., issued for 3 months in the market for $ 976,000. The company issued CP with a face value of $ 1,000,000. Determine the rate of return which A earns.

DR = Par Value Purchase Price * 360 (Par Value) (Days to Maturity)

= 1,000,000 976,000

* 360

(1,000,000)

(180)

=0.048 or 4.8 %

Source : - (http://www.qfinance.com/)

CHAPTER 6
` 20

COMMERCIAL PAPER

INNOVATIONS AND DEVELOPMENTS IN COMMERCIAL PAPER

6.1 INNOVATIONS OF COMMERCIAL PAPER
Master note is a new financial paper issued by finance companies to bank trust departments and other permanent money market investors. In an arranged agreement, the investing firm notifies the issuing company as to how much paper it will purchase on that particular day, and the issuing company in turn issues a paper on the maximum agreed amount. The interest on daily papers is pooled and taken by the investors during the current month. Medium-term notes are unsecured obligations, papers with a maturity period of 9 -10 months. These are issued by investment grade corporations at a fixed interest rate. These papers suit companies with substantial quantities of medium-term assets as they have longer maturities when compared to conventional CPs and IOUs. Asset-backed commercial paper gives credit at a lower interest rates to the corporates. This paper is nothing but, a pool of loans or credit receivables made into packages. These packages are issued in the form of a paper, and these loans or receivables are removed from the issuing companies balance sheet and are placed in a Special-Purpose Entity (SPE). SPE issues the commercial paper to cover discount price and uses the proceeds for purchase of the receivables. The issuing customer usually services the underlying receivables, collects interest and principal payments and passes the funds to SPE. In the process a bank is chosen to service the receivables supporting the paper issue. CPs are likely to have good future so long as can be tailored to meet the needs of both the buyers and issuers in terms of maturity, liquidity and returns.

6.2 COMMERCIAL PAPER LATEST DEVELOPMENTS

21

COMMERCIAL PAPER

1. Preference for dematerialized Holding: As a part of new guidelines to issue CPs released in October, 2000, banks, FIs, PDs and SDs were advised to invest and hold CP only in dematerialized form, as soon as arrangements for such dematerialization are put in place. As the existing arrangements for dematerialized holding for CP are now considered adequate and satisfactory, banks, FIs, PDs are permitted to make fresh investments and hold CP only in dematerialized form. Similarly they are also permitted to make fresh investments and hold bonds, debentures, privately or otherwise only in demat form. As regards the equity instruments they are permitted to be held by the above mentioned institutions only in dematerialized form, from the date notified by SEBI. 2. Documentation and Procedure: As part of the guidelines on new issue of CP released in October, 2000, FIMMDA was entrusted with the task of prescribing standard procedures and documentations that are to be followed by the participants, in consonance with the international best practices. In this regard, FIMMDA has been in dialogue with RBI and in the process of devising such standard procedures and documentation. Before finalization, FIMMDA would circulate a draft of these guidelines among its members and other market participants.

Source : - (http://www.themanagementor.com/)

CHAPTER 7
` 22

COMMERCIAL PAPER

GUIDELINES FOR ISSUE OF COMMRECIAL PAPER

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 enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements of their operations. Guidelines for issue of CP are presently governed by various directives issued by the Reserve Bank of India, as amended from timer to time. In pursuance of the Statement on Monetary and Credit Policy for the Year 2000-2001, to keep pace with several developments in the financial market, it has been decided to modify the guidelines in the light of recommendations made by an Internal Group. Now, the Reserve Bank in exercise of the powers conferred by Sections 45J, 45K and 45L of the Reserve Bank of India Act, 1934 (2 of 1934) issues the following guidelines replacing all earlier directions/guidelines on the subject.

1. Who can issue Commercial Paper (CP)

Corporate, Primary Dealers (PDs) and Satellite Dealers (SDs), and the All India Financial Institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by Reserve Bank of India are eligible to issue CP. 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 institutions; and c. the borrowable account of the company is classified as a Standard Asset by the financing bank/s/institution/s.

23

COMMERCIAL PAPER

2. Rating Requirement
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 insurance of CP that the rating so obtained is current and has not fallen due for review. 3. Maturity CP can be issued for maturities between a minimum of 15 days and a maximum up to 1 year from the date of issue.

4. Denominations
CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by single investor should not be less than Rs.5 lakh (face value).

5. Limits and the Amount of issue of Commercial Paper

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. 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. 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 percent of its net owned funds, as per the latest audited balance sheet. 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

24

COMMERCIAL PAPER

subscription. CP may be issued on a single date or in parts in different dates provided that in the later case, each CP shall have the same maturity date. Every CP issued should be reported to the Chief General Manager, Industrial and Export Credit Department (IECD), Reserve Bank of India, Central Office, Mumbai through the Issuing and Paying Agent (IPA) within three days from the date of completion of the issue, incorporating details as per Schedule II. Every issue of CP, including renewal, should be treated as a fresh issue.

6. Who can act as an Issuing and Paying Agent (IPA)?

Only a schedule bank can act as an IPA for issuance of CP.

7. Investment in Commercial Paper

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 Institutionals (FIIs). However, investments by FIIs would be within the limits set for their investments by Securities and Exchange Board of India (SEBI).

8. Mode of Issuance
CP can be issued either in the form of a promissory note (Schedule I) or in a dematerialized form through any of the depositories approved by and registered with SEBI. As regards the existing stock of CP, the same can continue to be held either in physical form or can be dematerialized, if both the issuer and investor agree for the same. CP will be issued at a discount to face value as may be determined by the issuer. No issuer shall have the issue of Commercial Paper underwritten or coaccepted.

9. Preference for Dematerialized Form

25

COMMERCIAL PAPER

While option is available to both issuers and subscribers, to issue/hold CP in dematerialized or physical form, issuers and subscribers are encouraged to prefer exclusive reliance on dematerialized form of issue/holding. Banks, Financial Institutions, PDs and SDs are advised to invest and hold CPs only in dematerialized form, as soon as arrangements for such dematerialization are put in place.

10. Payment of Commercial Paper

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 the CP is held in physical form, the holder of the CP shall present the instrument for payment to the issuer through the IPA. However, when the CP is held in demat form, the holder of the CP will have to get it redeemed through the depository and receive payment from the IPA.

11. Standby Facility

In view of CP being a stand alone product, it would not be obligatory in any manner on the part of banks and FIs to provide standby facility to the issuers of CP. Banks and FIs would, however, have the flexibility to provide for a CP issue, credit enhancement by way of standby assistance/credit backstop facility, etc. based on their commercial judgment and as per terms prescribed by them. However, these should be within the prudential norms as applicable and subject to specific approval of the Board.

12. Procedure for Issuance

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 investors 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).

13. Role and Responsibilities

` 26

COMMERCIAL PAPER

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 the RBI and amount mobilized through issuance of CP is within the quantum indicated by CRA for the specified rating. ii) IPA has to verify all the documents submitted by the issuer viz., copy of board resolution, signatures of authorized 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) Original documents verified by the IPA should be held in the custody of IPA. 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 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 also have to closely monitor the rating assigned to issuers vis--vis their track record at regular intervals and would be required to make its revised ratings public through its publications and websites. Fixed Income Money Market and Derivatives Association of India (FIMMDA), as a Self-Regulatory Organisation (SRO) for the fixed income money market securities, may prescribe, for operational flexibility and smooth functioning of CP market, any standardized procedure and documentation to be followed by the participants, in consonance with the
` 27

COMMERCIAL PAPER

international best practices. Till such time, the procedures/documentations prescribed by IBA should be followed. Violation of these guidelines will attract penalties prescribed in the Act by the RBI and may also include debarring from the CP market.

14. Non-applicability of Certain Other Directions

Nothing contained in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 shall apply to any NonBanking Financial Company (NBFC) insofar as it relates to acceptance of deposit by issuance of CP, in accordance with these Guidelines.

Source : - (http://www.ambi.org.in/)

CHAPTER 8
PROFORMA

28

COMMERCIAL PAPER

All endorsements upon the commercial paper must be clear and distinct. Each endorsement should be written within the space allotted. Name of the Issuing Company Stamp duty to be affixed as in force, in the state in which it is to be issued Serial No. Issued at: _____________________ Date of issue: ____________________ (Place) Date of Maturity: ___________________________ without days of grace. (If such date happens to fall on holiday, payment shall be made immediate preceding working day) For value received ______________________________ hereby (Name of Issuing Company) promises to pay __________________ (Name of Investor) Or order on the maturity date as specified above the sum of Rs __________ (in words) upon presentation and surrender of this Commercial Paper at____________________________for and on (Name of the Issuing and Paying Agent) behalf of _______________________ (Name of Issuing Comp.)

Authorized Signatory Confidential

29

COMMERCIAL PAPER

Proforma of proposal to be submitted By the issuing company (issuer) for Issue of Commercial Paper. To be submitted to Financing banking company To, Dear Sir,
Commercial Paper Program of issue

In terms of the Directions issued by the RBI, vide Notification No. IECD. / 89(CP)- 89/90 dated 11th December,1989, as amended from time to time, we propose to issue Commercial Paper as per details furnished hereunder:
i. ii. iii. iv. v. Name of the Issuer Registered Office and Address : Whether Issuer is a FERA Company : Business Activity Name/s of Stock Exchange/s With whom shares of the company Are listed (not applicable to Government Companies : Tangible net worth as per latest Audited balance sheet (copy enclosed): A. amount of Commercial Paper Proposed to be issued (Face value) : B. Tenor (Period of issue) Rating obtained from the Credit Rating Information Services of India Ltd. (CRISIL) or any other Agency approved by the Reserve Bank (A copy of the rating certificate Should be enclosed) : :

vi. vii. viii.

For and on behalf of (Name of Issuing Company) Authorized Signatory

CERTIFICATE
` 30

COMMERCIAL PAPER

We hereby certify that we have verified the signature of the executants of the attached Commercial Paper bearing:

Sr. No. ____________ Dated ___________ for Rs. ____________ which tally with the specimen signature filled by ____________________________ (Name of the Issuing Company)

(Authorized Signatory/signatories) Place: _______________

Date: ________________

(Name of financing banking company)

Source : - (http://www.scribd.com/)

CHAPTER 9

31

COMMERCIAL PAPER

CONCLUSION
Commercial Paper is an unsecured, short term loan issued by a corporation, Therefore, many corporations, borrowing short-term money from banks is often a laborious and annoying task. The desire to avoid banks as much as possible has led to the widespread popularity of commercial paper. Here by I conclude that, commercial paper is a very safe investment because the financial situation of a company can easily be predicted over a few months. Furthermore, typically only companies with high credit rating and credit worthiness issue commercial paper. Doing this project was a delightful experience for me as I got to know a lot about Commercial Paper and a lot about Banks functioning.

CHAPTER 10
REFERENCE
` 32

COMMERCIAL PAPER

Books:Advance financial arrangement By Dr. M.A. Kohok (Page No. 40 to 46) Financial Market & Instruments

Journal:8th Edition 2004 Everest Publishing House Pune

Websites:http://www.indianmoney.com/ http://www.mbaknol.com/financial-management/ http://www.indianmba.com/ http://www.helium.com http://www.qfinance.com/ http://www.themanagementor.com/ http://www.ambi.org.in/ http://www.scribd.com/

CHAPTER 11
ANNEXURE
` 33

COMMERCIAL PAPER

Questionnaire

1. What is Commercial Paper (CP) ? Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. 2. When it was introduced? It was introduced in India in 1990. 3. Why it was introduced? It 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 satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. 4. Who can issue CP? Corporate, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. 5. Whether all the corporate would automatically be eligible to issue CP No. 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

34

COMMERCIAL PAPER

c. the borrower account of the company is classified as a Standard Asset by the financing bank/s/ institution/s. 6 Is there any rating requirement for issuance of CP? And if so, what is the rating requirement? Yes. All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from 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 agency (CRA) 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 and the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid. 7 What is the minimum and maximum period of maturity prescribed for CP? CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue. 8 What is the limit up to which a CP can be issued? 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. As regards FIs, they 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.

35

COMMERCIAL PAPER

9. In what denominations a CP that can be issued? CP can be issued in denominations of Rs.5 lakh or multiples thereof. 10. How long the CP issue can remain open? 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. 11. Whether CP can be issued on different dates by the same issuer? Yes. 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. Further, every issue of CP, including renewal, shall be treated as a fresh issue. 12. Who can act as Issuing and Paying Agent (IPA)? Only a scheduled bank can act as an IPA for issuance of CP. 13. Who can invest in CP? Individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, amount invested by single investor should not be less than Rs.5 lakh (face value). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India (SEBI. 14. Whether CP can be held in dematerilaised form? Yes. 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. Banks, FIs, PDs and SDs are directed to hold CP only in dematerialised form. 15. Whether CP is always issued at a discount?

36

COMMERCIAL PAPER

Yes. CP will be issued at a discount to face value as may be determined by the issuer. 16. Whether CP can be underwritten? No issuer shall have the issue of Commercial Paper underwritten or co-accepted. 17. What is the mode of redemption? Initially the investor in CP is required to pay only 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, (a) When the CP is held in physical form, the holder of the CP shall present the instrument for payment to the issuer through the IPA. (b) When the CP is held in demat form, the holder of the CP will have to get it redeemed through the depository and receive payment from the IPA. 18. Whether Stand by facility is required to be provided by the bankers/FIs for CP issue? CP being a `stand alone product, it would not be obligatory in any manner on the part of banks and FIs to provide stand-by facility to the issuers of CP. However, Banks and FIs have the flexibility to provide for a CP issue, credit enhancement by way of stand-by assistance/credit backstop facility, etc., based on their commercial judgement and as per terms prescribed by them. This will be subjected to prudential norms as applicable and subject to specific approval of the Board. 19. Whether non-bank entities/corporates can provide guarantee for credit enhancement of the CP issue. Yes. Non-bank entities including corporates can provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided : a. the issuer fulfils the eligibility criteria prescribed for issuance of CP; b. the guarantor has a credit rating at least one notch higher than the issuer by an approved
` 37

COMMERCIAL PAPER

credit rating agency and c. the offer document for CP properly discloses: the networth 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. 20. Role and responsibilities of the Issuer/Issuing and Paying Agent and Credit Rating Agency Issuer: a. Every issuer must appoint an IPA for issuance of CP. b. The issuer should disclose to the potential investors its financial position as per the standard market practice. c. 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). Issuing and Paying Agent a. IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI and amount mobilised through issuance of CP is within the quantum indicated by CRA for the specified rating. b. IPA has to verify all the documents submitted by the issuer viz., copy of board resolution, signatures of authorized 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

38

COMMERCIAL PAPER

with the issuer (Schedule III). c. Certified copies of original documents verified by the IPA should be held in the custody of IPA. Credit Rating Agency a. 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. b. Further, the credit rating agency 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. c. While the CRAs can decide the validity period of credit rating, CRAs 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 its revision in the ratings public through its publications and website 21. Is there any other formalities and reporting requirement with regard to CP issue? Fixed Income Money Market and Derivatives Association of India (FIMMDA), as a selfregulatory organization (SRO) for the fixed income money market securities, may prescribe, in consultation with the RBI, any standardized procedure and documentation for operational flexibility and smooth functioning of CP market. Every CP issue should be reported to the Chief General Manager, Industrial and Export Credit Department (IECD), Reserve Bank of India, Central Office, Mumbai through the Issuing and Paying Agent (IPA) within three days from the date of completion of the issue, incorporating details as per Schedule II.
Source : - (http://www.scribd.com/)

39