The Hindu Business Line : CP for classes and deposits for masses

Despite its inherent advantages led by its potential to dictate terms to the banking sector, CP has not taken the Indian corporate working capital finance by storm.

S. Murlidharan

Commercial paper (CP) made its mark in India in 1989 in response to the clamour by corporates to break free of the stranglehold of the banking sector in the matter of working capital finance. While banks do offer better terms to blue-chip companies vis-À-vis others, CP enables blue-chip companies to mobilise funds for working capital purposes from a wide array of sources, including banks, FIIs, mutual funds and high net worth individuals on their t erms.

Conditions apply

To be sure, a company seeking to access the CP market needs to have a minimum P-2 credit rating for its instrument from CRISIL or an equivalent rating from other accredited agencies. It also needs to have a sanction of a bank or all-India financial institution for working capital limits which in addition should have classified its outstanding as standard assets.

The minimum net worth size of Rs 4 crore of course has never seriously bothered any company seeking CP. Parenthetically, the RBI therefore needs to hike the size to a more realistic level. Be that as it may, the flexibility to issue CP for maturities ranging from as low as seven days to a maximum of one year with the freedom to price the issue in keeping with the prevailing rates of interest and the goodwill of the company makes it the ideal choice for well-managed companies.

Despite its inherent advantages led by its potential to dictate terms to the banking sector, CP has not taken the Indian corporate working capital finance by storm. The year 2007-08 was an exception and the funds mobilised from this source was Rs 40,985 crore a near three-fold increase from Rs 13,095 mobilised in the preceding year.

One explanation trotted out is that well managed companies having access to External Commercial Borrowings (ECB) look askance at the CP market.

The purpose of this article however is not to bemoan the rather lukewarm response to CP in India. Instead, the purpose is to juxtapose it against what may appear to be another alternative source of short-term finance — deposits from public.

To be sure, there are vital differences between the two, chief amongst them being CP targeting wholesale funds, as it were, with Rs 5 lakh being its size and CP being issued at discount to face value.

Negotiability adds lustre to CP because deposits are not transferable and any attempt at premature withdrawal is discouraged by a punitive 2 per cent reduction in interest. The real clincher however is CP’s positioning itself as an esoteric product catering to HNI and institutions, thereby making its administration relatively hassle-free and cheaper. But both are unsecured. Both carry interest with CP begetting implicit interest, which redemption at face value of an instrument issued at a discount amounts to, and deposits begetting explicit interest.

While a company can mobilise as much as it wants through issuance of CP subject only to the danger of its rating going askew because of the heightened risk perception inevitably associated with excessive borrowings, aggregate deposits from the public cannot exceed 25 per cent of the net worth of a company.

CP thus is for the classes while deposits are for the masses. Which is perhaps why deposit rules are more stringent with small depositors getting quicker redress from the Company Law Board (CLB) in case of default by companies.

CP does tantalise a banker sitting on a huge pile of cash after meeting the CRR and SLR norms mandated by the RBI, with corporates trying to ensnare them with returns that are a notch better than the ones offered by gilts.

(The author is a Delhi-based chartered accountant. Responses to blfeedback@thehindu.co.in)

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