The Securities and Exchange Board of India (“SEBI”) issued the ‘Framework for listing of Commercial Paper’ vide Circular no. SEBI/HO/DDHS/DDHS/CIR/P/2019/15 dated October 22, 2019, in response to interest expressed by the Issuers of Commercial Paper (“CP”) for listing CPs for trading on stock exchanges, in turn, to expand investor participation in CPs. This framework is instructed by the recommendation of the corporate bonds and securitization advisory committee (CoBoSAC), chaired by Harun Rashid Khan, former Deputy Governor of the Reserve Bank of India (“RBI”).
Issue of CP in India is governed by the Reserve Bank Commercial Paper Directions 2017 issued vide Notification number FMRD.DIRD.01/CGM (TRS) - 2017 dated August 10, 2017 (“RBI Directions”). Herein, RBI provides comprehensive norms for the issue of CPs, however envisages its secondary market trading restricted only to Over-the-Counter Exchanges.
In order to fully understand SEBI’s recent circular, it is important to understand the history and characteristics of CP as well as the RBI Directions.
Characteristics
Fixed income instruments are broadly of two main types. Capital market securities are those securities with maturities of over a year, while money market securities mature in less than a year. CP is a money market instrument and is thus governed by Section 45W of the RBI Act 1934. It is defined as an unsecured money market instrument issued in the form of a promissory note with original tenor between seven days to one year. This short term unsecured debt instrument was first 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.[1] Subsequently, primary dealers and all-India financial institutions were also permitted to issue CPs to enable them to meet their short-term funding requirements for their operations.[2]
RBI Directions
Eligible issuers
Companies including NBFCs and AIFIs conditionally so that fund-based facility is availed of from bank(s) and/or financial institutions is classified as a standard asset by all financing/institutions at the time of the issue.
Other entities like co-operative societies/unions, government entities, trusts, LLPs and any other body corporate having a presence in India with a net worth of INR 100 Crore or higher, subject to aforementioned conditions.
Any other entity specifically permitted by the RBI.
Eligible Investors
All residents and non-residents permitted to invest in CP under the Foreign Exchange Management Act 1999, saving investment in CPs issued by related parties.
CP’s essential countenances
Issued in form of P-Note (per the format provided in the Directions)
Held in a dematerialized format.
Minimum denomination of issue - INR 5 Lakh and multiples thereof.
Issued at a discount to the face value.
The exact end-use of CP needs to be disclosed in the offer document at the time of issue.
No issuer shall have the issue of CP underwritten or co-accepted.
Credit Rating
Eligible issuers whose total issuance during a calendar year is greater than INR 1000 Crore, require credit rating from at least two SEBI registered CRAs and the lower of the two rating has to be adopted. Where both ratings are same, issuance shall be for the lower of the two amounts for which ratings are obtained.
The Minimum credit rating for a CP is A3 implying that CP, for issuance, must bear a moderate degree of safety regarding timely payment of financial obligations[3].
The Directions also prescribe norms to the tune of “Issue of CP-Credit Enhancement Limits”, “Buyback of CP”, “Duties and Obligations of Issuer, Issuing and paying agent and the CRA”
Besides this, the issuers, investors and Issuing and Paying Agents need to comply the standard procedures and documentation prescribed by Fixed Income Money Market and Derivatives Association of India (FIMMDA) as ‘Operational Guidelines on CPs’.
Framework for listing of CPs
This Framework is an enabler to the listing of CPs on stock exchanges, thereby enabling expansion of funding mechanism for high rated companies. However, in the interest of investors, the Framework mainly places various disclosure and compliance requirements on the issuer of CP desirous of listing.
Compliance required from Issuers and Stock exchanges
Desirous issuer must submit an application for listing along with the disclosures specified in Annexure to concerned stock exchange(s).
On approval by the concerned stock exchange(s), disclosures so provided along with the application must be made available on the website of such stock exchange(s).
Post listing, the issuer must make disclosures, as specified in Annexure-II, during the tenure of CP(s) to the concerned stock exchange(s) which shall, in turn, disseminate the same on its website.
Stock exchange(s) are also required to set up firstly, necessary systems and procedures for monitoring the disclosures specified in Annexure I & II of the Circular and secondly, a framework for the imposition of a fine for non-compliance and/or inappropriate disclosures by the issuers.
What are the disclosures to be provided with the application for listing?
Issuer details, with line of business, CEO, Group affiliations, details of directors, change in directors in last three financial years, top 10 holders of equity shares of the company as on date or the latest quarter-end and statutory auditor, details of change in statutory auditors in last three financial years, list of top 10 debt securities and CP holders each.
Material information disclosures – details of all default/s and/or delay in payments of interest and principal of CPs (including technical delay), debt securities, term loans, External Commercial Borrowings and other financial indebtedness including corporate guarantee issued in the past 5 financial year including in the current financial year.
Ongoing and/or outstanding material litigation and regulatory strictures, if any. Any material event/ development having implications on the financials/ credit quality including any material regulatory proceedings against the issuer/ promoters, tax litigations resulting in material liabilities, corporate restructuring event which may affect the issuer or the investor’s decision to invest/ continue to invest in the CP.
Details of borrowings of the company as on the last quarter-end. Issue information (Details of current trance, CP borrowing limit, end-use of funds, credit support/enhancement, financial information, asset-liability management disclosures).
Continuous obligations and disclosure requirements for listing CPs
Submission of financial results in terms of Reg 33 of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (“LODR Regulations”) and additional line of items per Reg. 52(4) therein. Issuers who have listed NCD’s/NCRPS or both and are required to comply with provisions of Chapter V of LODR Regulations and also have outstanding listed CPs or have only outstanding listed CPs shall prepare and submit financial results in terms of Reg. 52 therein.
Material events or information as soon as but not later than 24 hours – expected default/ delay/ default in timely fulfilment of its payment obligations for any of the debt instrument. Any action that shall adversely affect, the fulfilment of its payment obligations in respect of CPs. Any revision in the credit rating. A certificate confirming the fulfilment of its payment obligations within 2 days of payment becoming due.
Issuers who are NBFCs/HFCs must simultaneously submit to the stock exchanges the latest Asset Liability Management statements as and when they are submitted to the respective regulator(s) viz RBI/NHB, as applicable.
A certificate from the CEO/CFO to the recognized stock exchange(s) on quarterly basis certifying that CP proceeds are used for disclosed purposes, and adherence to other listing conditions, as specified in Annexure I.
[2] Ibid