ISSUE MANAGEMENT

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Commercial Paper
Unlike equity, funds raised through debt can be for both Short and Long term. Businesses can meet their
short term fund requirements from banks or they can decide to go directly to the markets to raise these
funds if that is cheaper.
One way of raising short term funds directly from the financial markets is, by issuing an instrument called
Commercial Paper or CP.
Features of Commercial Paper
Tenor: CPs are called money market instruments as they are of short duration, i.e. of a tenor less than 1
year.
Issuance: CPs must be issued in multiples of INR 500,000 (Face Value). They may be issued in physical
or dematerialized form through any of the depositories approved by and registered with SEBI.
Security: CPs are unsecured i.e., they do not create any lien on the assets of the company.
Coupon: CPs are issued as zero coupon bonds or discount instruments. That is, they are issued at a
discount to the face value, and you get face value on maturity.
Who can issue a commercial paper?
The tangible net worth (paid up capital + free reserves) of the company, as per the latest audited
balance sheet, should not be less than INR 40 million.
The Company should have been sanctioned working capital limits by bank/s or all-India Financial
Institution/s.

The loan account of the company should be classified as a Standard Asset (not a Non-Performing Asset
or NPA) by the financing bank/s/institutions.

Credit Rating Requirements
The minimum rating has to be P-2 of CRISIL, or an equivalent rating by other agencies.
The issuer has to ensure that the rating at the time of issuance of CP is current. That is, it is still valid
and has not fallen due for review.
Finally, the maturity of the CP cannot exceed the validity period of the credit rating. That is, if the credit
rating is valid for 6 months, the CP cannot have a tenor of 9 months.

Limits for a CP Issue
ISSUE MANAGEMENT
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The aggregate amount of CPs that can be issued must be within:
The limit as approved by the Board of Directors of the company or the quantum indicated by the Credit
Rating Agency for the specified rating.
A Financial Institution (FI) can also issue CPs, but within the overall umbrella limit fixed by the RBI.
Umbrella limit refers to the total borrowings the FI can do.
Stand-by Facility
Sometimes, the credit rating agency may insist (for a good rating) on a stand-by, or guarantor, for the CP
issue.
This is termed as credit enhancement. The issuer can have a bank or FI provide this facility.
Day Count Conventions
A convention about interest rates that makes life difficult for a newcomer (and many old-timers as well),
is the Day Count convention. Simply put, day count conventions tell us how to count the number of days
between two interest dates, and convert the number of days into a years fraction.
Years fraction = The number of days between two interest dates/The number of days in a year
Actual/ 360 (Act/ 360): Used for money market instruments in the U.S.
Actual/ 365 (Act/ 365): The number of days between two interest dates/365. Used for money market
instruments in India.
30/ 360: Used for Central Government bonds in India.
Actual/ Actual (Act/ Act): Used in the U.S. Government bond markets.
CP Issuance Participants
Issuer: These are mainly corporates, and less often FIs, who are looking to meet their short term
funding requirements.
Investor: These are mainly banks, other corporates and money market mutual funds.
Money market mutual funds are large investors in CPs, given the higher yield, as compared to
government securities.
Depository: NSDL/CDSL - A depository holds the CPs in demat form and assigns an unique identification
number- an ISIN- for the CP.
I ssuing and Paying Agent (I PA): This is a scheduled bank that acts as an intermediary between the
issuer and investor. This is where a merchant banker comes in.
ISSUE MANAGEMENT
A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM
Finitiatives Learning India Pvt. Ltd. (FLIP), 2010. Proprietary content. Please do not misuse!
He will help structure and price the issue, manage the bidding process and ensure the funds are collected
and distributed to the issuer.
CP Issuance Process
1. The issuer approaches the merchant banking division of a scheduled bank, to act as an IPA for
their CP issue.
2. The issuer will sign an agreement with the IPA in the format prescribed.
3. The issuer will also sign an agreement with the depository, to admit its CP in demat form. The
unique identification number (ISIN) is then assigned to the CP. This usually takes 1-2 working
days, and must be activated before the CP issue can take place.
4. The issuer then informs the IPA of the activated ISIN number.
5. The IPA opens a CP allotment account with a DP.
6. The company credit this account with the total CP issue, on the value date.
7. The IPA then debits this account and credits the different investors account with the number of
CPs each has purchased.
8. The IPA also opens an exclusive current (bank) account for the issuer. The issue proceeds once
the issue process is completed, are credited to this account and then paid to the issuer.
CP Redemption Process
1. On maturity, the CP holder must inform his DP to transfer the CPs to the CP redemption account
of the IPA. In case the CP is in physical form, it will be handed over to the IPA.
2. The transfer should be done before 3.00 p.m. on one working day before the maturity date
3. The holder must intimate the IPA on where (which bank & account) the maturity proceeds have
to be paid.
4. Once the payment of the Face value is made, the IPA must inform the registrar to
extinguish/cancel the securities. In case the payment date is a holiday, the preceding working
day is taken as the payment date.
5. In case of a payment default, the IPA will inform the investor.