Description
The PPT explaining about Commercial Paper which is an unsecured money market instrument issued in the form of a promisory note.
Commercial Paper(CP)
Introduction:
• Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note • It was introduced in India in 1990 to enable highly rated corporate borrowers to diversify their sources of short term borrowings and to provide an additional instrument to investors • Guidelines for issue of CPs are presently governed by Reserve Bank Of India • CP is a low cost alternative to a line of credit with a bank
Advantages of CP:
• • • • High credit ratings fetch a lower cost of capital Wide range of maturity provide more flexibility It does not create any lien on the assets of the company Tradability of CP provides investors with exit options
Disadvantages of CP:
• Its usage is limited to only blue chip companies • Issuances of CP brings down the bank credit limits • A high degree of control is exercised on the issue of CP
Who can issue CPs?:
• Corporates who satisfy the following conditions: a) Tangible net worth as per the latest audited balance sheet is not less than Rs.4 crore. b) The company has been sanctioned working capital limit by bank(s) or all India financial institution(s) c) The borrowal account of the company is classified as a standard asset by the financing banks/institutions
• Primary dealers • All India Financial Institutions that have been permitted to raise short term resources under the umbrella limit fixed by the RBI
Rating Requirement:
• Credit Rating should be obtained from either CRISIL or ICRA or CARE or the FITCH Ratings India Pvt. or such other credit rating agencies as may be specified by RBI from time to time • Minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies
Maturity
• From 7 days (min) to one year(max) from the date of issue • Should not go beyond the date for which rating is valid • Every issue of renewal should be treated as fresh issue
Denominations
• 5 Lakhs or multiple of 5 lakhs
• Single investor cannot invest less than five lakhs
Limitations
• Issued as Stand alone product • Amount raised should be lower of limit as approved by board of director or quantum indicated by credit rating agency • FI issue CP as per limit fixed by RBI • Total amount including CP, term money borrowing, CD Should not exceed 100% of net owned funds.
Limitations cont.
• Amount proposed should be raised within two weeks from the date issuer open the issue for subscription • • Can be issued in parts or on single date Maturity date for the parts should be same
Who can Act as Issuing and Paying Agent?
• Only a scheduled bank can act as an IPA for issuance of CP
• Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934.
Who Can Invest in Commercial Papers?
Commercial Paper 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) • Foreign Institutional Investors (FII)
Mode of Issuance
• CP can be issued either in the form of a promissory note or in a dematerialised form through any of the depositories approved by and registered with SEBI • CP will be issued at a discount to face value as may be determined by the issuer
• No issuer shall have the issue of CP underwritten or co-accepted
Preference for Demat Form
• Reduced fees and costs as compared to the physical form of issuance • Risks of delivery of certificates on time is eliminated • Problem of daylight overdrafts arising from nonsynchronous issuing and redeeming is reduced
Estimating commercial paper yields
YCP = Commercial paper yield Par = Face value at maturity PP = Purchase price n = number of days to maturity
Examples of Indian companies issuing Commercial Papers
• 2006 – Bajaj Auto issued CPs upto extent of INR 4000 mn rated as P1+ by CRISIL
• 2009 – CPCL INR 1.5 bn Commercial Paper programme rated A1+ by ICRA
Procedure for Issuance
• Issuer must appoint an Issuing and Paying Agent • Disclose financial information to the potential investors
1
2
• After the confirmation of the Deal, the issuer has to issue physical certificates to the investor (now in DEMAT form) • Or Arrange for crediting CP to investor’s account
3
• Investors shall also be given a copy of IPA certificates, saying that the issuer has a valid agreement with the IPA
Roles and Responsibilities
Issuer Issuing and Paying Agent (IPA)
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 or BOD
Verify all the documents and issue a certificate that all the documents are in order Report the CP issue to CGM, FMD, RBI If IPA is an NDS member, then disclose on the NDS platform within 2 days
Credit Rating Agency
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 It’s CRAs discretion to determine the validity of the Rating and must indicate when the rating is due for review
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
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.
Recent Action in Commercial Paper Market
Commercial paper are seen replacing the bank credit by top companies for Working Capital Requirement. There has been tremendous growth in the CP market in recent times.
100,000 15 80,000 Amount (Rs cr) 12.8 Interest Rate (%)
60,000
10.6
40,000
8.4
20,000
6.2
0
June
June April April February February October October August
4
March
March April May May
August
December
November
Amount Outstanding
Weighted Avg Discount Rate (%)
November
September
September
December
January
January
May
June
July
July
Reasons for high liquidity and lowering yields on CP
• Mutual funds and insurance companies prefer CPs and CDs to maintain liquidity as they are short term instruments. • The rising liquidity in the financial markets brought down the CD rates lower, because banks have limited appetite for CD issuances. The rates which were atleast 200 basis points above prevailing RBI repo rates, decreased to sub repo rate levels. • The investors thus moved to CPs for higher yields. This move increased the demand for CPs and thus brought down the yields on CPs as well. • There has been high speculation in the market for the decrease in the debt-instruments yields, which will further lower the yields on the CPs, the mutual funds are thus buying more of CPs so that they can sell them at lower yields for capital gains.
Road Ahead for CPs
Since its introduction in 1990, he RBI has been revising the guidelines to issue CP in India. The revisions have been made to increase the investments in CP
Jan 1990 Tangible Net Worth WCFBL* Minimum Size 10 Crore 25 Crore 1 Crore July 1990 5 Crore 15 Crore 50 Lakh July 1991 10 Crore 25 Lakh July 1992 5 Crore June 1994 4 Crore 4 Crore July 1995 Sep. 1996 Feb. 1997 Oct. 2000 5 Lakh Should not exceed WCFBL 5 Lakh Oct. 2004 -
Maximum Size
20% of MPBF**
-
30% of MPBF
75% of MPBF
-
75% of Cash 100% of Credit Cash Credit Compone nt Compone nt -
100% of WCFBL
-
Denominations Maturity Period
25 Lakh 91days - 6 months
10 Lakh -
5 Lakh -
-
3 months – 1year
-
-
15 days – 7days 1 year One Yr.
Credit Rating
P1+ by CRISIL or Equal grade by other agencies
-
P2
-
-
-
-
-
Other Measures
The current Costs involved in CP issuance :
1. Stamp duty 0.2% - If placed through banks 1.0% - If placed through merchant bankers 0.10% (subject to a minimum of Rs.100,000) (for a rating from CARE)
2. Rating fees*
3. Issuing and paying agent fee 0.1%
Recommendations:
• The Stamp duties should be abolished, as there are no stamp duties in the US, UK and France market • Many countries like US, UK don’t require credit ratings, RBI should thus relax the rating norms to P3 • The primary market is active in CP, but the secondary market is not that active, RBI should thus reduce the Face Value to boost secondary market activity in CPs
References:
• • • • • www.rbi.org.in www.wikipedia.com www.investopedia.com economictimes.indiatimes.com www.indiastat.com
Thank You
doc_741202834.ppt
The PPT explaining about Commercial Paper which is an unsecured money market instrument issued in the form of a promisory note.
Commercial Paper(CP)
Introduction:
• Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note • It was introduced in India in 1990 to enable highly rated corporate borrowers to diversify their sources of short term borrowings and to provide an additional instrument to investors • Guidelines for issue of CPs are presently governed by Reserve Bank Of India • CP is a low cost alternative to a line of credit with a bank
Advantages of CP:
• • • • High credit ratings fetch a lower cost of capital Wide range of maturity provide more flexibility It does not create any lien on the assets of the company Tradability of CP provides investors with exit options
Disadvantages of CP:
• Its usage is limited to only blue chip companies • Issuances of CP brings down the bank credit limits • A high degree of control is exercised on the issue of CP
Who can issue CPs?:
• Corporates who satisfy the following conditions: a) Tangible net worth as per the latest audited balance sheet is not less than Rs.4 crore. b) The company has been sanctioned working capital limit by bank(s) or all India financial institution(s) c) The borrowal account of the company is classified as a standard asset by the financing banks/institutions
• Primary dealers • All India Financial Institutions that have been permitted to raise short term resources under the umbrella limit fixed by the RBI
Rating Requirement:
• Credit Rating should be obtained from either CRISIL or ICRA or CARE or the FITCH Ratings India Pvt. or such other credit rating agencies as may be specified by RBI from time to time • Minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies
Maturity
• From 7 days (min) to one year(max) from the date of issue • Should not go beyond the date for which rating is valid • Every issue of renewal should be treated as fresh issue
Denominations
• 5 Lakhs or multiple of 5 lakhs
• Single investor cannot invest less than five lakhs
Limitations
• Issued as Stand alone product • Amount raised should be lower of limit as approved by board of director or quantum indicated by credit rating agency • FI issue CP as per limit fixed by RBI • Total amount including CP, term money borrowing, CD Should not exceed 100% of net owned funds.
Limitations cont.
• Amount proposed should be raised within two weeks from the date issuer open the issue for subscription • • Can be issued in parts or on single date Maturity date for the parts should be same
Who can Act as Issuing and Paying Agent?
• Only a scheduled bank can act as an IPA for issuance of CP
• Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934.
Who Can Invest in Commercial Papers?
Commercial Paper 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) • Foreign Institutional Investors (FII)
Mode of Issuance
• CP can be issued either in the form of a promissory note or in a dematerialised form through any of the depositories approved by and registered with SEBI • CP will be issued at a discount to face value as may be determined by the issuer
• No issuer shall have the issue of CP underwritten or co-accepted
Preference for Demat Form
• Reduced fees and costs as compared to the physical form of issuance • Risks of delivery of certificates on time is eliminated • Problem of daylight overdrafts arising from nonsynchronous issuing and redeeming is reduced
Estimating commercial paper yields
YCP = Commercial paper yield Par = Face value at maturity PP = Purchase price n = number of days to maturity
Examples of Indian companies issuing Commercial Papers
• 2006 – Bajaj Auto issued CPs upto extent of INR 4000 mn rated as P1+ by CRISIL
• 2009 – CPCL INR 1.5 bn Commercial Paper programme rated A1+ by ICRA
Procedure for Issuance
• Issuer must appoint an Issuing and Paying Agent • Disclose financial information to the potential investors
1
2
• After the confirmation of the Deal, the issuer has to issue physical certificates to the investor (now in DEMAT form) • Or Arrange for crediting CP to investor’s account
3
• Investors shall also be given a copy of IPA certificates, saying that the issuer has a valid agreement with the IPA
Roles and Responsibilities
Issuer Issuing and Paying Agent (IPA)
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 or BOD
Verify all the documents and issue a certificate that all the documents are in order Report the CP issue to CGM, FMD, RBI If IPA is an NDS member, then disclose on the NDS platform within 2 days
Credit Rating Agency
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 It’s CRAs discretion to determine the validity of the Rating and must indicate when the rating is due for review
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
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.
Recent Action in Commercial Paper Market
Commercial paper are seen replacing the bank credit by top companies for Working Capital Requirement. There has been tremendous growth in the CP market in recent times.
100,000 15 80,000 Amount (Rs cr) 12.8 Interest Rate (%)
60,000
10.6
40,000
8.4
20,000
6.2
0
June
June April April February February October October August
4
March
March April May May
August
December
November
Amount Outstanding
Weighted Avg Discount Rate (%)
November
September
September
December
January
January
May
June
July
July
Reasons for high liquidity and lowering yields on CP
• Mutual funds and insurance companies prefer CPs and CDs to maintain liquidity as they are short term instruments. • The rising liquidity in the financial markets brought down the CD rates lower, because banks have limited appetite for CD issuances. The rates which were atleast 200 basis points above prevailing RBI repo rates, decreased to sub repo rate levels. • The investors thus moved to CPs for higher yields. This move increased the demand for CPs and thus brought down the yields on CPs as well. • There has been high speculation in the market for the decrease in the debt-instruments yields, which will further lower the yields on the CPs, the mutual funds are thus buying more of CPs so that they can sell them at lower yields for capital gains.
Road Ahead for CPs
Since its introduction in 1990, he RBI has been revising the guidelines to issue CP in India. The revisions have been made to increase the investments in CP
Jan 1990 Tangible Net Worth WCFBL* Minimum Size 10 Crore 25 Crore 1 Crore July 1990 5 Crore 15 Crore 50 Lakh July 1991 10 Crore 25 Lakh July 1992 5 Crore June 1994 4 Crore 4 Crore July 1995 Sep. 1996 Feb. 1997 Oct. 2000 5 Lakh Should not exceed WCFBL 5 Lakh Oct. 2004 -
Maximum Size
20% of MPBF**
-
30% of MPBF
75% of MPBF
-
75% of Cash 100% of Credit Cash Credit Compone nt Compone nt -
100% of WCFBL
-
Denominations Maturity Period
25 Lakh 91days - 6 months
10 Lakh -
5 Lakh -
-
3 months – 1year
-
-
15 days – 7days 1 year One Yr.
Credit Rating
P1+ by CRISIL or Equal grade by other agencies
-
P2
-
-
-
-
-
Other Measures
The current Costs involved in CP issuance :
1. Stamp duty 0.2% - If placed through banks 1.0% - If placed through merchant bankers 0.10% (subject to a minimum of Rs.100,000) (for a rating from CARE)
2. Rating fees*
3. Issuing and paying agent fee 0.1%
Recommendations:
• The Stamp duties should be abolished, as there are no stamp duties in the US, UK and France market • Many countries like US, UK don’t require credit ratings, RBI should thus relax the rating norms to P3 • The primary market is active in CP, but the secondary market is not that active, RBI should thus reduce the Face Value to boost secondary market activity in CPs
References:
• • • • • www.rbi.org.in www.wikipedia.com www.investopedia.com economictimes.indiatimes.com www.indiastat.com
Thank You
doc_741202834.ppt