The issue of commercial paper (CP) is regulated by the RBI. The outstanding stocks of CP at the end of 15th Feb., 1995, were Rs.13.93 billion.
CPs are normally required to be rated and are issued for 90 days at a fixed rate of interest which is normally lower than the working capital interest rate charged by banks. The unit size of a CP issue is Rs.500,000 and the amount that can be raised through CPs is 75% of the working capital limit allowed by the banks. The minimum working capital limit required by a company to issue CPs is Rs.50 million.
The issuance of CPs used to result in a reduction of cash credit limit, and vice versa. This assured repayment of CPs on maturity, since the issuer company could automatically draw on the cash credit limits, in case of non roll-over. Companies could also obtain high credit rating because of this arrangement. This facility of stand-by arrangement against CPs, has been recently abolished by the RBI. After issuance of CP, if the issuer wishes to revive the earlier level of credit limit , it would hav to approach the bank for enhancement afresh, and the bank will then take a decision, based on the market conditions at that time.
This is likely to make CP a more independent money market instrument, with its rating reflecting the intrinsic strength of the company.
Centre for Monitoring Indian Economy, Bombay
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Last updated: May 1995.