India: Commercial Paper Directions: Amendments Introduce Enhanced Disclosures

Last Updated: 1 September 2017
Article by Manisha Shroff, Madhuparna Dasgupta and Meenakshi Kurpad

Most Read Contributor in India, August 2018

The Reserve Bank of India (RBI) introduced the Commercial Paper Directions, 2017 (Directions) on 10 August 2017. The primary purpose of the Directions is to regulate commercial papers (CPs) accepted as deposits by non-banking companies. The Directions supersede previous directions such as the Non-Banking Companies (Acceptance of deposits through Commercial Paper) Directions 1989, which had been amended in 1996, 1998, 2000 and further in 2012 (2012 Guidelines).

Section 45U of the Reserve Bank of India Act, 1934 (Act) includes 'Commercial Paper' as a money market instrument and the Directions define it as an unsecured money market instrument issued in the form of a promissory note, where the tenor of such commercial paper is between 7 (seven) days to 1(one) year.

Widening the gamut of Eligible Issuers

  • The terms 'Non-Banking Finance Companies' (NBFCs) and 'All India Financial Institutions' (AIFIs) have been introduced in the Directions. Earlier, AIFIs were defined as financial institutions (FIs) and NBFCs were defined within the realm of primary dealers (PD) which has now been expanded.
  • Under the Directions, the sole eligibility requirement for companies, including NBFCs and AIFIs, to issue CPs is that any fund-based facility availed from bank(s) and/or financial institutions is classified as a standard asset by all financing banks/institutions at the time of issue. The Directions dispense with the earlier minimum net-worth criteria and requirement to have working capital limits, making the process far simpler for companies and NBFCs. The removal of net worth criteria for companies is also expected to enable the small and medium sized corporate sector to access the commercial paper market easily for raising funds.
  • The Directions have also broadened the scope of eligible issuers by bringing in co-operative societies, unions, government entities, trusts and LLPs or any other body corporates having presence in India and having a net-worth of INR 100 crores or higher, subject to the aforementioned 'standard asset' classification requirement. Further, the Directions have also introduced the concept of special permission from the RBI for issuance of CPs by entities not otherwise covered under the Directions.

Form of CP

  • The form in which a CP may be issued remains largely the same as the previous regulations. The CP is to be issued as a promissory note in the format given in Annex I of the Directions and must be held in dematerialised form through any Securities and Exchange Board of India (SEBI) approved depository.
  • The CP shall be issued in minimum denomination of INR 5 lakhs (or multiples thereof) and shall be issued at a discount to the face value.
  • Underwriting and co-acceptance of CPs or provision of call or put options on the CPs are not permitted under the Directions.
  • Additional conditions which were imposed under the 2012 Guidelines relating to the issue of CP such as aggregate amount of CP that can be issued, flexibility by banks and financial institutions to fix working capital limits, issue of CP by a financial institution (FI) to be within the overall umbrella limit as per the Master Circular on Resource Raising Norms for FIs and the time period within which the total CP must be issued have been done away with.

Credit Enhancement mechanisms

  • While the requirement for CPs to be issued as a stand-alone product continues, the Directions provide that banks and FIs may, based on their commercial judgement, choose to provide stand-by assistance/credit, back-stop facility etc. by way of credit enhancement for a CP issue.
  • The conditions for credit-enhancing the CPs by way of issue of corporate guarantee/guarantee by non-bank entities remain the same. Non-bank entities (including corporates) may provide unconditional and irrevocable guarantees for credit-enhancing the CPs, subject to proper disclosures in the offer document regarding the net worth of the guarantor company, the names of the companies to which the guarantor has issued similar guarantees, the extent of the guarantees offered and the conditions under which the guarantee can be invoked.

Disclosure of end use

  • The exact end use is required to be disclosed in the offer document at the time of issue of the CP. This is a new addition in the Directions.

Eligible Investors

  • The Directions have broadened the scope of eligible investors by allowing all residents and non-residents to invest in CPs subject to compliance with the Foreign Exchange Management Act 1999 (FEMA).
  • However, investment in CPs issued by related parties in the primary or secondary markets cannot be made.
  • Further, investment by regulated financial sector entities are subject to their respective regulations.

Rating Requirements

  • The requirement to obtain a credit rating is now applicable to eligible issuers whose total CP issuance in a calendar year is INR 1000 crore or more. Credit rating must be obtained from a minimum of two credit rating agencies (CRAs) registered with the SEBI, and the lower of the two ratings must be adopted. If the ratings are the same, then the issuance shall be of the lower of the two amounts. It must be noted that this requirement to obtain two ratings is applicable from 1 October 2017.
  • The minimum credit rating is A3.

Trading

  • Over the counter (OTC) trades may now be settled through the clearing corporation of any recognised stock exchange or any other mechanism approved by the RBI.

Buyback of Commercial Paper

  • Issuers are allowed to buyback CPs at the prevailing market price, subject to the buyback offer being extended to all investors in the CP where the terms of the buyback are identical to all issuers. The buyback offer may not be made before 30 days before the date of issue. Once the CP is bought back, it shall be extinguished.
  • The requirement of approval from the board and intimation to the issuing and paying agent (IPA) has been done away with.

Offer Document

The Directions further stipulate certain minimum disclosure requirements under the offer document for the CPs in Annex II. These include disclosure of details of outstanding CPs and other debt instruments such as date of issuance, issue amount, date of maturity, amount outstanding, credit rating, names of CRA and IPA. The offer document must also disclose details of default of CPs or any other borrowings in the past three years, details of current tranche including amount, current credit rating, name of the IPA and CRA (along with its validity period). A summary of the last three years audited financials, material litigation and regulatory strictures must be attached. The end-use of funds must also be disclosed.

Duties and Obligations

The Directions lay down the various duties and obligations expected of an Issuer of CPs as well the Issuing and Paying Agent (IPA) and Credit Rating Agency (CRA), which are briefly described as follows:

Issuer

The Directions have laid down specific duties and obligations for an Issuer of CP which include appointment of an IPA, compliance with relevant requirements and furnishing a declaration of such compliance to the IPA, ensuring that proceeds from the issue of CP are towards the declared end uses, furnishing a board resolution of the company authorising the issuance of the CP to the IPA, keeping the banks and financial institutions informed of outstanding fund and non-fund facilities at the end of the month in which a CP was issued, arrangement of a demat account to credit the proceeds of the CP, enhanced information obligations to IRA and the credit rating agencies including routing all default details, delay, subscriptions, redemption, buybacks and payments and submitting a certificate from the CEO or CFO of the issuer that the proceeds of the CP are being used for the relevant end use.

Disclosures relating to default must be communicated on an immediate basis. The issuer must inform the CRA and IPA of any default or delay with respect to payments related to the CP on the same day. It must be noted that an issuer who has defaulted on a CP shall not be allowed to access the market for issue of CPs for a period of six months from the date of repayment of such defaulted obligation.

IPA

IPAs are now required to ensure the borrower is authorised to raise money by way of issuance of CPs. Under the 2012 Guidelines, the IPA was required to ensure a minimum credit rating of the CP, hold certified copies in their custody and report full details of defaults and buybacks to the RBI via email in the format specified. The Directions have sought to digitise the issuance of CPs by mandating IPAs to make available the IPA certificate in electronic form and report details of issuances, buyback and defaults in CPs on the F-TRAC platform. Until CCIL advises full operationalisation of F-TRAC, the current reporting arrangements shall continue.

CRA

The Directions have simplified the obligations of the CRAs. CRAs continue to be required to continuously monitor the assigned rating and disseminate revisions (if any) via public announcements on the date of change in rating.

Comment

The underlying theme of the new Directions is focused on enhanced disclosure measures, while at the same time attempted to ease the rigid eligibility conditions which previously restricted the issue of commercial paper. The broadened disclosure measures include reporting of defaults on all fund and non-fund based facilities to banks, thereby not limiting it to merely commercial paper. The Directions have introduced disclosures that are to be made in the offer documents. It broadens investor protection by mandating multiple credit ratings for the issuance of CP. Investors can now make better informed decisions before investing in CPs that are issued. The Directions also widens the scope of issue of commercial paper by allowing more entities to be eligible as issuers as well investors.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions