Comments
Corporates may have to wait for a day to issue a new Commercial Paper (CP) after redeeming a maturing CP.
The Reserve Bank of India is considering mandating this cooling period to deal with the tendency of some corporates to continuously replace one CP — an unsecured short-term debt paper — with another. Its fear is that the chain can break because of a rating downgrade of a CP leading to a cascading effect.
What the new norm will mean is that a corporate will have to first repay a ‘maturing’ CP from its internal accruals and only thereafter raise resources via a fresh CP issuance the following day.
Such a move will end rollovers in the money market; this is a device some firms use to ‘manage’ their finances by repaying a maturing CP from the proceeds of a fresh issue.
The RBI is believed to be considering incorporating the one-day cooling period clause in its guidelines on the issue of CPs, according to market players.
Key funding source
That CP is a significant source of funding for India Inc is underscored by the fact that as at March-end 2019, scheduled commercial banks’ investments in the instrument stood at ₹90,360 crore. Mutual funds, too, invest in CPs. However, the outstanding amount invested by them could not be ascertained.
As per RBI guidelines, CPs can be issued by companies, non-banking finance companies (NBFCs), All-India Financial Institutions (AIFIs) and other entities including co-operative societies/unions, government entities, trusts, limited liability partnerships and any other body corporate having a presence in India — with a minimum net worth of ₹100 crore.
CPs are issued by way of private placement at a discount to the face-value. They can be issued for a period of not less than seven days and up to one year, for a minimum denomination/marketable lot of ₹5 lakh, and multiples thereof.
IL&FS crisis
The RBI’s tightening should be seen in the context of the IL&FS imbroglio, wherein sharp rating downgrade of debt instruments issued by the infrastructure lender and some if its subsidiaries led to a systemic problem, affecting investors, mutual funds and banks.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.