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Eligibility criteria for issuing Commercial Papers in India
The following conditions are to be fulfilled by the firm for issuing Commercial Papers.
1. The issuing firm should have a tangible net worth of not less than Rs.4 crore as per the latest balance sheet.
2. The firm should have working capital limit of not less than Rs.4 crore.
3. The current ratio should be minimum 1.33 as per the latest balance sheet.
4. The firm should have minimum P2/A2 rating from CRISIL/ICRA/CARE or any other credit Rating Agency for the purpose. The rating should not be more than two months old from the date of issue of the Commercial Paper.
5. The borrowing account of the firm is classified as standard assets by financing banking company / companies.
Conditions for issuing Commercial Papers in India
No Commercial Paper can be issued for a period less than 15 days from the date of its issue. There is no grace period for payment of Commercial Papers. The RBI has increased the maturity period of the Commercial Papers from a maximum of 6 months to a maximum of less than 1 year period from the date of its issue.
There is, however, reluctance on the part of investors, especially banks to invest in less than 1 year Commercial Paper because of the absence of a secondary market. Commercial Paper may be issued to any person including individuals, banks and other corporate bodies registered/incorporated in India and unincorporated bodies. It cannot, however, be issued to NRI’s.
A firm issuing Commercial Paper may request the banker to provide standby facility for an amount not exceeding the amount of issue for meeting the liability of Commercial Paper on maturity. The financing banker shall correspondingly reduce the working capital limits of every firm issuing the Commercial Paper.
Norms for Issuing Commercial Papers in India
As per the guidelines issued by RBI, a firm will issue Commercial Papers through same bank/consortium of banks from whom it has a line of credit. In other words, instead of making loans and advances, the bank will deal in the issue.
Another underlying issue is the time dimension. The firms applying for issue of Commercial Paper to RBI have to obtain credit rating, which should not be more than two months old. This implies that firm intending to issue Commercial Paper has to obtain a fresh rating if time lapses.
Besides, once the RBI approves a firm’s application, it has to make arrangement within 15 days for placing the CP privately.
Advantages of Issuing Commercial Papers
The advantages of commercial paper lie in its simplicity involving hardly any documentation between the issuer and the investor and its flexibility with regard to short-term maturity.
A well rated firm can diversify its sources of finance from banks to the short term money markets at a somewhat cheaper cost, especially in a situation of easy money market.
The Commercial Paper provides investors with higher returns than they could obtain from the banking system. They have to pay off their debts semi-annually i.e., for instance eight installments over a period of years.