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In a bid to make commercial papers (CPs) attractive, the Reserve Bank of India has allowed issuers to buyback these instruments before maturity.
The central bank, in its directions on CP, has also diluted by a notch the minimum credit rating requirement for CPs so that more companies can tap this route to meet their short-term funding requirements for their operations.
A CP is an unsecured money market instrument issued in the form of a promissory note. These instruments are issued by corporate borrowers to diversify their sources of short-term borrowings and to provide and additional instrument to investors.
In its directions on CPs, the RBI said the buyback of CP should be through the secondary market and at prevailing market price.
According to K. Boovendran, Deputy General Manager, Bank of Maharashtra, the flexibility of buyback will allow CP issuers to redeem the instruments before maturity whenever they have surplus liquidity. This move could save the issuer from having to service the instrument till the maturity date. The RBI said the CP cannot be bought back before a minimum period of seven days from the date of issue. Buyback of CPs should be undertaken after taking approval from the board of directors.
Minimum rating diluted
To enable more companies to tap the CP route for raising short-term resources, the RBI has diluted the minimum rating requirement. The minimum rating shall be ‘A-3’ as against ‘A-2’ earlier.
As per Crisil’s rating methodology, short-term debt instruments with ‘A-2’ rating are considered to have strong degree of safety regarding timely payment of financial obligations. Such instruments carry low credit risk.
Instruments with ‘A-3’ rating are considered to have moderate degree of safety regarding timely payment of financial obligations. Such instruments carry higher credit risk as compared to instruments rated in the two higher categories.
IPA
The issuing and paying agents (IPAs) for a CP issue have been assigned the responsibility to report full particulars of defaults in repayment of CP to the RBI. Further, they also have to report all instances of buyback of CPs undertaken by the issuer. Banks act as IPAs to CP issuances.
According to RBI data, during the March 23-December 14, 2012, period, bank investments in CPs were lower at Rs 11,920 crore as against Rs 14,790 crore during March 25-December 16, 2011.
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