COMMERCIAL PAPER
AND
CERTIFICATE OF DEPOSIT
Prof. B. Charumathi
Professor
Department of Management Studies
Pondicherry University
Meaning and Introduction:
 Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory
note.
 Introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their
sources of short-term borrowings and to provide an additional instrument to investors.
 Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to
enable them to meet their short-term funding requirements for their operations.
 Issuers – Corporates
primary dealers (PDs)
All-India Financial Institutions (FIs)
• A corporate would be eligible to issue CP provided –
a. the tangible net worth of the company, as per the latest audited balance sheet, is
not less than Rs. 4 crore
b. company has been sanctioned working capital limit by bank/s or all-India financial
institution/s; and
c. the borrowal account of the company is classified as a Standard Asset by the
financing bank/s/ institution/s.
• Investors :
1.
banking companies
2.
other corporate bodies (registered or incorporated in India) and
3.
unincorporated bodies
4.
Non-Resident Indians (NRIs) and
5.
Foreign Institutional Investors (FIIs) etc. can invest in CPs.
6.
Individuals
•
However, investment by FIIs would be within the limits set for them by Securities and
Exchange Board of India (SEBI) from time-to-time.
Reporting Requirements:
• Fixed Income Money Market and Derivatives Association of India (FIMMDA), may
prescribe, in consultation with the RBI, any standardised procedure and
documentation for operational flexibility and smooth functioning of CP market.
• Issuers / IPAs may refer to the detailed guidelines issued by FIMMDA on July 5, 2001
in this regard, and updated from time-to-time.
• Every CP issue should be reported to the Chief General Manager, Reserve Bank of
India, Financial Markets Department, Central Office, Fort, Mumbai through the
Issuing and Paying Agent (IPA) within three days from the date of completion of the
issue, incorporating details as per Schedule III given in the Master CircularGuidelines for Issue of Commercial Paper dated July 1, 2011 and updated from
time-to-time.
Features:
1. Maturity - 7 day – 1 year , should not go beyond the date up to which the credit rating of the issuer is
valid.
2. The aggregate amount - shall be within the limit as approved by its Board of Directors or the quantum
indicated by the Credit Rating Agency for the specified rating, whichever is lower.
3. The total amount should be raised within a period of two weeks from the date on which the issuer
opens the issue for subscription.
4. As regards FIs, they can issue CP within the overall umbrella limit prescribed in the Master Circular on
Resource Raising Norms for FIs, issued by DBOD and updated from time-to-time.
5. CP may be issued on a single date or in parts on different dates provided that in the latter case, each CP
shall have the same maturity date.
6. Every issue of CP, including renewal, shall be treated as a fresh issue
7. In denominations of Rs.5 lakh or multiples thereof.
8. Only
a scheduled bank can act as an IPA ( Issuing & Paying agent) for issuance of CP.
9. CP can be issued either in the form of a promissory note (Schedule I given in the
Master Circular-Guidelines for Issue of Commercial Paper dated July 1, 2011 and updated
from time –to-time) or in a dematerialised form through any of the depositories
approved by and registered with SEBI.
10. But Banks, FIs and PDs can hold CP only in dematerialised form.
11. CP will be issued at a discount to face value as may be determined by the issuer.
12. No issuer shall have the issue of Commercial Paper underwritten or co-accepted.
13. CPs are actively traded in the OTC market. Such transactions, however, are to be
reported on the FIMMDA reporting platform within 15 minutes of the trade for
dissemination of trade information to market participation thereby ensuring market
transparency.
14. On maturity of CP,
(a) when the CP is held in physical form, the holder of the CP shall present the instrument for
payment to the issuer through the IPA.
(b) when the CP is held in demat form, the holder of the CP will have to get it redeemed through
the depository and receive payment from the IPA.

But Initially the investor in CP is required to pay only the discounted value of the CP by
means of a crossed account payee cheque to the account of the issuer through IPA.
15. Non-bank entities including corporates can provide unconditional and irrevocable guarantee for credit
enhancement for CP issue provided :
a. the issuer fulfils the eligibility criteria prescribed for issuance of CP;
b. the guarantor has a credit rating at least one notch higher than the issuer by an approved credit
rating agency and
c. the offer document for CP properly discloses:
c.1. the net worth of the guarantor company
c.2. the names of the companies to which the guarantor has issued similar guarantees
c.3. the extent of the guarantees offered by the guarantor company, and
c.4. the conditions under which the guarantee will be invoked.
Rating Requirements:
1. All eligible participants shall obtain the credit rating for issuance of Commercial
Paper either from
a. Credit Rating Information Services of India Ltd. (CRISIL) or the
b. Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the
c. Credit Analysis and Research Ltd. (CARE) or the
d. FITCH Ratings India Pvt. Ltd. or
e. such other credit rating agency (CRA) as may be specified by the Reserve
Bank of India from time to time, for the purpose.
2. The minimum credit rating shall be A-2 [As per rating symbol and definition
prescribed by Securities and Exchange Board of India (SEBI)].
Role and responsibilities of the Issuer/Issuing and Paying Agent and Credit Rating
Agency:
Issuer:
a. Every issuer must appoint an IPA for issuance of CP.
b. The issuer should disclose to the potential investors its financial position as per the
standard market practice.
c. After the exchange of deal confirmation between the investor and the issuer, issuing
company shall issue physical certificates to the investor or arrange for crediting the CP
to the investor's account with a depository.
d. Investors shall be given a copy of IPA certificate to the effect that the issuer has a
valid agreement with the IPA and documents are in order (Schedule II given in the
Master Circular-Guidelines for Issue of Commercial Paper dated July 1, 2011 and
updated from time –to-time).
Issuing and Paying Agent
a. IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI
and amount mobilised through issuance of CP is within the quantum indicated by CRA
for the specified rating or as approved by its Board of Directors, whichever is lower.
b. IPA has to verify all the documents submitted by the issuer viz., copy of board
resolution, signatures of authorised executants (when CP in physical form) and issue a
certificate that documents are in order. It should also certify that it has a valid agreement
with the issuer (Schedule II given in the Master Circular-Guidelines for Issue of
Commercial Paper dated July 1, 2011 and updated from time –to-time).
c. Certified copies of original documents verified by the IPA should be held in the custody
of IPA.
Credit Rating Agency
a. Code of Conduct prescribed by the SEBI for CRAs for undertaking rating of capital
market instruments shall be applicable to them (CRAs) for rating CP.
b. Further, the credit rating agencies have the discretion to determine the validity
period of the rating depending upon its perception about the strength of the issuer.
Accordingly, CRA shall at the time of rating, clearly indicate the date when the rating is
due for review.
c. While the CRAs can decide the validity period of credit rating, CRAs would have to
closely monitor the rating assigned to issuers vis-a-vis their track record at regular
intervals and would be required to make its revision in the ratings public through its
publications and website
CERTIFICATE OF DEPOSIT
Meaning and Introduction:
 Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised
form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial
institution for a specified time period.
 It was introduced in India in 1989.
 Governed by various directives issued by the Reserve Bank of India (RBI)
 CDs can be issued by:
•Scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}
•Selected All-India Financial Institutions (FIs) that have been permitted by RBI
 Banks have to maintain the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) on the price of
a Certificate of Deposit.
 The CDs are issued at discount price on face value. So return is the difference between issue price
and face value
 Issue Size:
• Minimum amount = 1 lakh and in multiple of Rs 1 lakh thereafter
• Maximum amount
1. Banks can issue CDs depending on their funding requirements
2. An FI can issue CD within the overall umbrella limit prescribed in the Master Circular on Resource
Raising Norms for FIs, issued by DBOD and updated from time-to-time
 CDs can be issued to:
1.Individuals
2.Corporations
3.Companies (including banks and PDs)
4.Trusts
5.Funds
6.Associations
7.Non-Resident Indians (NRIs), but only on non-repatriable basis. Such CDs cannot be endorsed to
another NRI in the secondary market.
 Foreign portfolio investors (FPIs) are not permitted to invest in CDs
 The maturity period of CDs is different for banks and FIs.
1.For Banks
a.Minimum Period is 7 days
b. Maximum period is 1 year
2. For financial institutions
a.Minimum Period is 1 year
b.Maximum period is 3 years
 Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before
maturity.
 Transferability of CD
1.CDs in physical form are freely transferable by endorsement and delivery.
2.CDs in demat form can be transferred as per the procedure applicable to other demat securities.
 Format of CD
Banks / FIs should issue CDs only in dematerialised form. However, according to the Depositories Act,
1996, investors have the option to seek certificate in physical form.
Discount
A certificate of deposit can be issued at a discount on its face value. Furthermore, banks and financial
institutions can issue certificates of deposits on a floating rate basis. However, the method of calculating the
floating rate should be market-based.
Reporting
Banks’ fortnightly return should include certificates of deposits as per Section 42 of the RBI Act, 1934.
Furthermore, banks and financial institutions should also report about certificates of deposits under the
Online Returns Filing System (ORFS).
How to buy/sell a dematerialized certificate of deposit in India:
• similar to buying and selling of shares.
• First of all buyers and sellers agrees upon price and quantity of CDs for the transaction.
• Then after this, the seller authorises its DP (depository participant) through delivery instruction slip.
• Instruction to debit sellers accounts and transfer the CD to buyers account. Buyer need not have an
account with the seller’s DP.
 It is the seller’s DP responsibility to transfer the quantum of the sold CD to the buyers account even if
the DP is different.
 Buyers receive CD immediately after the transaction. However, for this, the seller must give one-time
standing instruction to its DP for the same.
 One important point to note here is that the settlement of funds between buyers and sellers is done
outside the ambit of NSDL. Like for shares, NSDL is also the authorised depository for the certificate of
deposits in India. The fund’s settlements for transactions in CDs in the secondary market is done
through authorised stocks brokers itself.
Lists of Indian certificate of deposit issuers
S.No
Banks/FI
Total Units
Settled (till
Nov 18)
Average
Yields
1
AXIS BANK LIMITED
14618020
7.00
2
IDFC BANK LIMITED
13312435
6.84
3
INDUSIND BANK LIMITED 10293482
7.17
4
HDFC BANK LIMITED
7519565
7.07
5
ICICI BANK LIMITED
6332790
6.93
6
VIJAYA BANK
4543150
6.76
7
YES BANK LIMITED
4458610
7.19
S.No
Banks/FI
Total Units
Average
Settled (till Nov
Yields
18)
8
RBL BANK LIMITED
2542050
7.03
9
KOTAK MAHINDRA BANK
LIMITED
2317400
6.89
10
THE SOUTH INDIAN BANK
2162955
LTD.
6.84
11
SMALL INDUSTRIES
DEVELOPMENT BANK OF
INDIA
2106180
7.55
12
INDIAN BANK
1846250
6.72
13
UNION BANK OF INDIA
1420950
6.76
14
PUNJAB AND SIND BANK
1231000
6.56