RBI revamps Directions for issuance of Commercial Paper

By Richa Saraf, legal@vinodkothari.com

The Reserve Bank of India (RBI) vide Notification No. MRD.DIRD.01/CGM (TRS) – 2017 dated August 10, 2017 has issued Reserve Bank Commercial Paper Directions, 2017 (“New Directions”). The new guidelines are in supersession of the existing directions on Commercial Paper in the Master Directions on Money Market (Section II) RBI/FMRD/2016-17/32 dated July 7, 2016 (“Old Directions”). The following table captures the difference between the old and new directions:-

Particulars New Directions[1] Draft Directions[2] Old Directions[3] Our comments
Eligible issuers Companies- including NBFCs

are eligible to issue CPs subject to the condition that any fund-based facility availed of from bank(s) and/or financial institutions is classified as a standard asset by all financing banks/institutions at the time of issue.

Companies

  1. with sanctioned working capital limit and
  2. standard asset classification

by banks/ FIs

Companies

  1. with tangible net worth of not less than 4 crores;
  2. with working capital; and
  3. standard asset classification by banks
One of the major changes in the Directions is the removal of minimum net-worth requirement. Therefore, now even small and medium sized companies will be able to raise funds through CPs, provided the other requirements under the Directions are complied with.
All India Financial Institutions-

are eligible to issue CPs subject to the condition that any fund-based facility availed of from bank(s) and/or financial institutions is classified as a standard asset by all financing banks/institutions at the time of issue.

All India Financial Institutions

  1. with sanctioned working capital limit and
  2.  standard asset classification

by banks/ Fis

Financial Institutions – No eligibility conditions for issuance Same as above.
Primary dealers – No eligibility conditions for issuance Primary dealers – No eligibility conditions for issuance
Other entities- like co-operative societies/unions, government entities, trusts, limited liability partnerships and any other body corporate-

a.       having presence in India;

b.      with a net worth of Rs. 100 crore or higher; and

c.       subject to the condition that any fund-based facility availed of from bank(s) and/or financial institutions is classified as a standard asset by all financing banks/institutions at the time of issue.

Other entities

  1. with working capital and
  2.  standard asset classification by banks
  3. Minimum net-worth of Rs. 100 crores
No such category Earlier only companies were allowed to raise funds through CP, but now other form of entities can also raise funding through issuance of CPs. However, looking at the minimum net-worth requirement in this category, we feel only foreign entities can explore this route for fund raising.
  Such other entity as permitted by RBI Such other entity as permitted by RBI No such provisions
Tenor 7 days to 1 year 7 days to 1 year 7 days to 1 year
Eligible Investors
  1. All residents, and non-residents permitted to invest in CPs under Foreign Exchange Management Act, 1999 are eligible to invest in CPs;
  2. No person can invest in CPs issued by related parties either in the primary or secondary market.
  3. Regulated financial sector entities subject to regulatory restrictions as applicable to them.
  1. Residents
  2. Non-residents
  3. Regulated financial sector entities subject to regulatory restrictions as applicable to them

Related parties cannot invest

  1. Individuals
  2. Banks
  3. Other body corporates/ unincorporated entities
  4. Non-residents Indians
  5. Foreign institutional investors subject to regulatory restrictions as applicable to them
The regulators tread very cautious when it comes to related party transactions. The same has also found some caveats in the consultation paper where related parties are barred from investing in commercial paper issuances.
Form of issuance Demat Demat Physical or demat
Denomination 5 lakh and multiples thereof 5 lakh and multiples of 1 lakh 5 lakh and multiples thereof The provisions under the Old Directions have been retained in the New Directions, despite the proposal to change in the same in the Draft Directions.
Mode of issuance Silent on it. Silent on it. Private placement
Rating requirement Eligible issuers, whose total CP issuance during a calendar year is Rs. 1000 crore or more, shall obtain:

a.    credit rating for issuance of CPs from 2 (Two) rating agencies and lower rating to be quoted

b.   Where both ratings are the same, the issuance shall be for the lower of the two amounts for which ratings are obtained.

c.    Minimum rating is A3

 

a.    2 (Two) rating and lower rating to be quoted

b.    Minimum rating is A3

a.    2 (Two) rating and lower rating to be quoted

b.    Minimum rating is A3

The New Directions state that rating has to be obtained from at least two rating agencies and the lower of the two shall apply.

In case the rating issued by both the CRAs are same, then the issuer shall be able to issue CPs to the extent of the lower of the two amounts for which ratings have been obtained.

Let us take an example –

Company A obtains the following ratings –

·         Rating Agency A – A1 for Rs.1000 crores

·         Rating Agency B – A1 for Rs. 1500 crores

Here the Company will be able to issue CPs to the extent of Rs. 1000 crores only.

Now, what if the Company wants to raise another Rs. 500 crores? – It will have to seek a fresh rating from Rating Agency A for Rs. 1500 crores.

 

Obligations of Issuer a.    Appoint an Issuing and Paying Agent (IPA) for issuance of a CP.

b.    Comply with all relevant requirements under these directions and furnish a declaration in this regard to the IPA.

c.    Furnish the board resolution authorizing the company to borrow through issuance of a CP to the IPA.

d.   Keep the bank(s) from whom it has outstanding fund or non-fund based credit facility(ies) informed of its market borrowings, including through CPs, latest by the end of the month in which a CP was issued.

e.    Arrange for crediting the CP to the demat account of the investor with the depository through the IPA within 7 (Seven) days of issue.

f.     Route all subscriptions/ redemptions/ buybacks/ payments and default details through the IPA.

g.    Submit a certificate from the CEO/ CFO to the concerned IPAs on quarterly basis that CP proceeds are used for disclosed purposes, and certifying adherence to other conditions of the offer document and the CP directions. The certificate may be provided within 15 (Fifteen) days from the close of the quarter.

h.   Inform the CRA and IPA on the same day about any default/ delay in CP related payments.

i.      The issuer who has defaulted on a CP shall not be allowed to access the CP market for 6 (Six) months from the date of repayment of the defaulted obligation.

Ensure that the guidelines and procedures laid down for the issuance of CP are strictly adhered to. a.     Comply with all relevant requirements under these Directions.

b.     Appoint an IPA for issuance of CP.

c.     Furnish the Board Resolution authorizing the company to borrow through issuance of CP to the IPA.

d.    Keep the bank (s) from whom it has outstanding credit facility (ies) informed of its market borrowings, including through CPs, latest by the date of borrowing.

e.     Arrange for crediting the CP to the Demat account of the investor with the depository through the IPA.

f.      Route all subscriptions/redemptions/payments through the IPA.

g.     Submit a certificate from the CEO/CFO to the concerned IPAs on quarterly basis that CP proceeds are used for disclosed purposes, and certifying adherence to other conditions of the offer document.

 

This provides for additional compliance requirements on  the issuer.
CRA obligations No such approval criteria provided Take approval for rating No such approval criteria provided The Draft Directions proposed the CRAs to obtain specific approval from RBI for rating CPs, however, the same has been dropped in the New Notification.
Reporting requirement for IPA a.       Report the details of issuance of CP, or its buyback and instances of default on the F-TRAC platform (after these functionalities are made operational), by the same day before the close of business hours.

b.      Until CCIL advises full operationalisation of F-TRAC, the current reporting arrangements shall continue.

a.         Reduced reporting requirement

b.      Report the details of issuance of CP and instances of default on the F-TRAC platform by same day before close of the business hours.

  1. Report the details of issuance of CP on the Online Returns Filing System (ORFS) module of the RBI within 2 (Two) days from the date of issuance of the CP.
  2. On occurrence of default in repayment of CP report to CGM, Financial Markets Department, RBI, Mumbai.
  3. On buyback report CGM, Financial Markets Department, RBI, Mumbai.
Offer document a.       Details of outstanding CPs and other debt instruments as on date of new issuance including date of issuance, amount issued, maturity date, amount outstanding, credit rating, name of credit rating agency and name of IPA

b.      3 (Three) years audited financials or if the issuer has not been in existence for three years, available audited financials, material litigation and regulatory strictures

c.       Default of CPs or any other borrowings for past three years.

d.      Details of current tranche including amount, current credit rating, name of credit rating agency, its validity period and details of IPA

e.       End-use

a.       3 (Three) years audited financial standing

b.      CPs outstanding and new issuance information

c.       Ratings received

d.      Defaults in CPs in the past, including technical defaults.

e.       End use

1 (One) year financial standing to be provided This provides for additional disclosure requirements in the offer document
End use restriction No end use restrictions

The exact end use shall be disclosed in the offer document at the time of issue of a CP.

Current assets and operating expenses. No end use restrictions The exact end use shall be disclosed in the offer document and the proceeds from issue shall be utilised only for the purposes of such end use.

In most cases, CPs are issued for general corporate purposes.

Buy-back CPs a.      Buyback, in full or part, shall be at the prevailing market price.

b.      Buy-back to be extended to all investors and the terms of the buyback should be identical for all investors in the issue.

c.       Cannot buy back before 30 (Thirty) days of issuance

d.       Needs to extinguish once bought back

a.         Cannot buy back before 60 (Sixty) days of issuance

b.      Needs to extinguish once bought back

c.       Buy-back to be extended to all investors

a.    Cannot buy back before 7 (Seven) days of issuance

b.    Buy-back is to be effected through secondary market

 

The waiting period for buy back of CPs have been increased from 7 days to 30 days.

Further, earlier, the Directions did not specify anything regarding the buy-back price, but as per the New Directions, the buy-back has to be done at the prevailing market price.

Settlement of CPs reported on F-TRAC T+0 or T+1 days T+1 days Same day settlement or T+1 days This is same as before.
Credit enhancement a.    A CP shall be issued as a ‘stand-alone’ product.

b.   Banks and FIs may, based on their commercial judgement, choose to provide stand-by assistance/credit, back-stop facility etc. by way of credit enhancement for a CP issue.

c.    Non-bank entities (including corporates) may provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided the offer document for CP properly discloses the net worth of the guarantor company, the names of the companies to which the guarantor has issued similar guarantees, the extent of the guarantees offered by the guarantor company, and the conditions under which the guarantee will be invoked.

CP is unsecured with no credit enhancements feature. Unsecured CP with credit enhancements The credit enhancement provisions providing stand-by support to issuance has also been featured in the new directions.
Reporting Requirement of CRA a.    Continuously monitor the rating assigned to an issue and disseminate rating revisions, if any, to public through its publications and on its website.

b.   Publicly disseminate the ratings of the CP and any subsequent change in the ratings, on the date of rating or change in rating, as the case may be.

No such requirement now CRAs were at discretion to determine the validity period of rating and shall indicate the date when the rating is due for review. The additional disclosure requirements on the CRAs will only increase transparency.

[1] https://rbidocs.rbi.org.in/rdocs/content/pdfs/43CPD10082017.pdf

[2] https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3309

[3] https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10495#2

 

 

[1] https://rbidocs.rbi.org.in/rdocs/content/pdfs/43CPD10082017.pdf

[2] https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3309

[3] https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10495#2

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