A commercial paper is an unsecured short-term debt market instrument in the form of a promissory note used by Indian corporates to raise short-term funds. These papers are privately-placed instruments.

Companies, primary dealers, and all Indian financial institutions are allowed to raise short-term funds through commercial papers to meet their working capital requirements.

These short-term papers are governed by the Reserve Bank of India's regulations and corporations that meet the following requirements can issue such papers:

• Minimum tangible net worth of ₹40 million as per the latest audited balance sheet.
• Has been sanctioned working capital limit by a bank or financial institution.
• The borrowal account of the company is classified as a standard asset by the financing bank of the financial institution.
• Has the required credit rating from credit rating agencies for issuance of commercial paper.

A commercial paper is issued for ₹500,000 and multiples thereof for maturities between 7 days and one year and is a discounted instrument like treasury bills and certificates of deposit. Both the face value and coupon rate are paid at maturity.

The Reserve Bank of India has permitted individuals, banks, companies, non-resident Indians, and foreign institutional investors to purchase and hold commercial papers.

These short-term debt securities can be issued in the primary market and are tradeable instruments in the secondary market on an over-the-counter basis. They are to be reported with a time stamp within 15 minutes of the execution on the Financial Market Trade Reporting and Confirmation system.

The settlement of commercial papers is done through the clearing corporations of recognized stock exchanges in India and is settled in the T+0 or T+1 cycle.

Issuances So Far

Commercial papers were introduced in India on Jan 1, 1990, to enable highly rated corporate borrowers to diversify their sources of short-term borrowing and to provide an additional instrument to investors.

Since then, there have been several changes to rationalize and standardize the commercial paper issuance process in line with other money market instruments.

Major changes in commercial paper issuances in India were announced in October 2000, when the organic link with the working capital (fund-based) limit was severed and commercial paper was allowed to be issued as a standalone product.

The issuances of commercial papers have increased in the recent period following the increasing investment interests seen from mutual funds and cost-effectiveness.

Many other relaxations were introduced by the Reserve Bank of India subsequently related to eligibility criteria, denomination of commercial papers, the quantum of commercial paper that could be issued against maximum permissible bank finance, and maturity terms, aiding the growth of these instruments.

The Indian market has seen a manifold increase in commercial paper issuances over the years. The commercial paper outstanding, which was ₹860 million at end of the financial year 1989-90, increased to ₹3.64 trillion by the end of January 2023 as per the Reserve Bank of India data.

In recent years, there have been a few cases of companies defaulting on their commercial papers in India.

In 2018, Dewan Housing Finance Corporation, and IL&FS Financial Services defaulted on the repayment of commercial papers.

In 2019, Reliance Home Finance, Sintex Industries, and Café Coffee Day also were unable to repay the commercial paper at the time of maturity and reported a default.

However, the Reserve Bank of India has taken prudent measures, and issuers that have defaulted on commercial papers are not allowed to access the commercial papers market for six months from the date of repayment of the defaulted obligations.

Benefits

Drawbacks

The main risk faced by an investor is that the issuer will not be able to issue further papers upon maturity, but this risk is kept low by the fact that most commercial papers are backed by the corporation's access to bank credit facilities.

Overall, these papers offer several benefits for issuers and investors in India. However investors should always conduct due diligence and assess a company's creditworthiness before investing in commercial papers.

Sources: Reserve Bank of India, Media Reports, FIMMDA, Clearing Corporation of India Limited