Commercial paper is an unsecured money market instrument, issued in the form of a promissory note, having a minimum tenor of 7 days and a maximum tenor of 1 year (Commercial Paper)1. Commercial Paper, being a money market instrument2, is regulated by the Reserve Bank of India (RBI) in terms of the Reserve Bank Commercial Paper Directions 2017 dated 10 August 2017 (RBI Directions) which inter alia stipulate who the eligible issuers3 and eligible investors are, and the end use of the funds raised. In addition to the RBI Directions, Commercial Paper is governed by the Operational Guidelines for Commercial Paper dated 31 March 2020 (Operational Guidelines) issued by the Fixed Income Money Market and Derivatives Association of India.
With a view to broadening investor participation, while balancing the need to protect investors by bringing in adequate transparency, the Securities and Exchange Board of India (SEBI) by a circular dated 22 October 20194 (SEBI Circular) prescribed a framework for listing of Commercial Paper and continuous disclosure norms to be followed by the issuer. The RBI Directions and the Operational Guidelines continue to apply to Commercial Paper and the SEBI Circular simply prescribes additional requirements for issuers who consider listing their Commercial Paper.
Considering that, within 2 months of the SEBI Circular permitting listing of Commercial Paper being issued, about 56 issuers listed 335 Commercial Paper on the BSE Limited raising INR 1,21,560 crores5, it appears that listed Commercial Paper has been accepted by issuers as a viable alternative source of short-term funding. Although these numbers may be staggering in the context of listed securities, during April to August 2019, the amount raised by issuers from Commercial Paper aggregated to INR 10,26,700 crores6. Therefore, it remains to be seen whether issuers prefer to list, and investors prefer to subscribe to listed, Commercial Paper.
In this article, we consider the following:
- Listing framework for Commercial Paper;
- Disclosure norms for continuous listing of Commercial Paper; and
- Efficacy of raising funds through listed Commercial Paper.
Listing framework for Commercial Paper
In order to list Commercial Paper, the issuer is required to file an application for listing with the concerned stock exchange(s) (Listing Application). The Listing Application must contain disclosures including: (i) details of the issuer, its directors and its statutory auditors; (ii) changes in the directors and statutory auditors in the last 3 financial years; (ii) details of top 10 equity shareholders, debt holders, and Commercial Paper holders; (iii) outstanding material litigation, delay and default in payment of interest and principal amount of Commercial Paper, debt securities, terms loans etc., and any other material information which may affect the issue; (iv) issue-related information including details of the current tranche, end use of the funds, and credit support or enhancement, if any; and (v) audited / limited reviewed consolidated and standalone financial statements along with auditor qualification’s for the last 3 years along with the latest available financial results. Upon approval from the stock exchange(s), the Commercial Paper is listed, and the Listing Application is uploaded on the website of the stock exchange(s).
Disclosure norms for continuous listing of Commercial Paper
While, the SEBI Circular mandates continuous disclosure obligations and consequently results in the regulator’s oversight on the issuer for the period for which the Commercial Paper is listed, these obligations are fewer than those for issuers of other listed securities. The SEBI Circular mandates that the issuer of the listed Commercial Paper must comply with certain continuous disclosure requirements as prescribed in the said circular which include: (i) disclosure of quarterly and year-to-end audited or limited reviewed financial results; (ii) submission of asset-liability management statements to the stock exchanges by an issuer who is a non-banking financial companies or housing finance companies simultaneously with submitting the same to respective regulator(s); (iii) issue of certificates to stock exchange(s), on a quarterly basis, from the chief executive officer or chief financial officer, certifying that the proceeds of the Commercial Paper are used for the disclosed purposes; and (iv) disclosure of material events including expected default / delay in the issuer’s payment obligations for debt instruments, any revision of credit rating or any action that can adversely affect its payment obligations with respect to the Commercial Paper.
Efficacy of raising funds through listed Commercial Paper
The process of issuance of listed Commercial Paper is efficient, economical, less arduous and requires limited disclosures7 than other listed securities such as equity shares, debentures and preference shares. Listing of Commercial Paper has also added transparency to the process of issuing Commercial Paper. This will encourage interest from eligible non-institutional and institutional investors and give issuers of Commercial Paper greater access to funds. Further, Commercial Paper as a short-term funding alternative is attractive to issuers due to low bank credit growth and the relatively cheaper cost of servicing a Commercial Paper qua short-term loans.
In light of the ongoing COVID-19 pandemic and the consequent lockdown and disruptions to business operations, companies are in need for short-term funding. While, short-term loans from banks and non-banking financial institutions may be available, considering the short-term nature of Commercial Paper coupled with the regulatory oversight from the RBI and the SEBI, this instrument will play an important role in bridging the short-term funding gap through participation of a wider spectrum of investors. Therefore, Commercial Paper could represent a useful alternative tool for entities to meet their short-term funding requirements during these trying times.