Transcript
CHAPTER 1- INTRODUCTION OF MONEY MARKET 1.1WHAT IS MONEY MARKET?
Money market refers to the market where money and highly liquid marketable securities are bought and sold having a maturity period of one or less than one year. It isnot a place like the stock market but an activity conducted by telephone. The moneymarket constitutes a very important segment of the Indian financial system.The highly liquid marketable securities are also called as ‗ money market instruments‘like treasury bills, government securi ties, commercial paper, certificates of deposit, call money, repurchase agreements etc. The major player in the money market are Reserve Bank of India (RBI), Discount and Finance House of India (DFHI), banks, financial institutions, mutual funds, government, big corporate houses. The basic aim of dealing in money market instruments is to fill the gap of short-term liquidity problems or to deploy the short-term surplus to gain income on that. Definition of Money Market: According to the McGraw Hill Dictionary of Modern Economics, ―money market is the term designed to include the financial institutions which handle the purchase, sale, and transfers of short term credit instruments. The money market includes the entire machinery for the channelizing of short-term funds. Concerned primarily with small business needs for working capital, individual‘s borrowings, and government short term obligations, it differs from the long term or capital market which devotes its attention to dealings in bonds, corporate stock and mortgage credit.‖
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According to the Reserve Bank of India, ―money market is the centre for dealing, mainly of short term character, in money assets; it meets the short term requirements of borrowings and provides liquidity or cash to the lenders. It is the place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers‘ agents comprising institutions and individuals and also the government itself.‖ According to the Geoffrey, ―money market is the collective name given to the various firms and institutions that deal in the various grades of the near money.‖ So after analyzing the above definitions, we can easily conclude with the following 1.2 FEATURES OF MONEY MARKET. -term funds are borrowed and lent.
over the phone and therefore, there is an essential need for the presence of well developed communications system. h or without the help the brokers. -term financial assets that are dealt in are close substitutes for money, financial assets being converted into money with ease, speed, without loss and with minimum transaction cost. aximum period of one year. -bank call money, bill rediscounting, and treasury bills, etc.
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ating needs of financial institutions
-term surplus and deficits. ity in the economy 1.3 OBJECTIVES OF MONEY MARKET: A well developed money market serves the following objectives: -term surplus and deficits. for the influencing liquidity in the economy. -term money to meet their requirements at a reasonable price. 1.4 HISTORY OF INDIAN MONEY MARKET Till 1935, when the RBI was set up the Indian money market remained highly, unorganized, shallow, disintegrated, narrow and therefore, very backward. The planned economic development that commenced in the year 1951 market an important beginning in the annals of the Indian money market. The nationalization of banks in 1969, setting up of various committees such as the Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986), the setting up of discount and finance house of India ltd. (1988), the securities trading corporation of India (1994) and the commencement of liberalization and globalization process in 1991 gave a further fillip for the integrated and efficient development of India money market.
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1.5 MONEY MARKET INSTRUMENTS Money market instruments are generally characterized by a high degree of safety of principal and are most commonly issued in units of $1 million or more. Maturities range from one day to one year; the most common are three months or less. Active secondarymarkets for most of the instruments allow them to be sold prior to maturity. Unlike organized securities or commodities exchanges, the money market has no specific location.Available from financial institutions, money markets give the smaller investor the opportunity to get in on treasury securities. The institution buys a variety of treasury securities with the money you invest. The rate of return changes daily, and services such as check writing may be offered. The major participants in the money market are commercial banks, governments, corporations, government-sponsored enterprises, money market mutual funds; futures market exchanges, brokers and dealers. Investment in money market is done through money market instruments. Money market instrument meets short term requirements of the borrowers and provides liquidity to the lenders. Common Money Market Instruments are as follows: 1. Treasury Bills 2. Repurchase Agreements (Repo/Reverse Repo) 3. Call Money 4. Commercial paper 5. Certificate of Deposits 6. Bankers Acceptance
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CHAPTER 2- INTRODUCTION TO COMMERCIAL PAPERS: 2.1 WHAT IS COMMERCIAL PAPER? Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was 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 satellite dealers were also permitted to issue CP to enable them to meet their shortterm funding requirements for their operations. A commercial paper is an unsecured short-term instrument issued by the large banks and corporations in the form of promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period to meet the short-term financial requirement. There are four basic kinds of commercial paper: promissory notes, drafts, checks, and certificates of deposit.It is generally issued at a discount by the leading creditworthy and highly rated corporates.Depending upon the issuing company, a commercial paper is also known as ―Financial paper, industrial paper or corporate paper‖. Commercial paper was initially meant to be used by the corporates borrowers having good ranking in the market as established by a credit rating agency to diversify their sources of short term borrowings at a rate which was usually lower than the bank‘s working capital lending rate. Commercial papers can now be issued by primary dealers, satellite dealers, and all- India financial institutions, apart from corporatist, to access short-term funds. Effective from 6th September 1996 and 17th June 1998, primary dealers and satellite dealers were also permitted to issue commercial paper to access greater volume of funds to help increase their activities in the secondary market. It can be issued to individuals, banks, and companies and other registered Indian corporate bodies and unincorporated bodies. It is issued at a discount
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determined by the issuer company. The discount varies with the credit rating of the issuer company and the demand and the supply position in the money market. In India, the emergence of commercial paper has added a new dimension to the money market\ 2.2 CHARACTERISTICS OF COMMERCIAL PAPER
CP are negotiable instruments and hence they are flexible. All eligible participants Should obtain credit rating for issuance of Commercial Paper either from Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd.
CP are issued in denominations of Rs.5 lakh or multiples thereof. CP can be invested by individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in Cps.
However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time.
2.3 TYPES OF COMMERCIAL PAPERS
Commercial papers are classified into:
Direct Papers: A direct commercial paper is issued directly by the company to the investors without any intermediary. Companies issuing direct papers announce the current rate of commercial paper with different maturities for investors to choose the CP that suits their requirement.
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Dealer Papers: A dealer/merchant banker on behalf of a client issues these types of commercial papers. The dealer arranges for the private placement of the paper and also provides advisory services such as timing of the issue, determination of the discount rate and a suitable maturity period. Companies and financial institutions tend to find alternative sources of funds whenever bank interest rates are higher than the interest rate prevailing in the market. Commercial paper is an easy, cheap and quick source of finance for thesenies.
2.4 ADVANTAGES AND DISADVANTAGES OF COMMERCIAL PAPER
SIMPLICITY The advantage of commercial paper lies in its simplicity. It involves hardly any documentation between the issuer and investor.
FLEXIBILITY The issuer can issue commercial paper with the maturities tailored to match the cash flow of the company.
EASY TO RAISE LONG TERM CAPITAL The companies which are able to raise funds through commercial paper become better known in the financial world and are thereby placed in a more favorable position for rising such long them capital as they may, form time to time, as require. Thus there is in inbuilt incentive for companies to remain financially strong.
HIGH RETURNS The commercial paper provides investors with higher returns than they could get from the banking system.
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MOVEMENT OF FUNDS Commercial paper facilities securitization of loans resulting in creation of a secondary market for the paper and efficient movement of funds providing cash surplus to cash deficit entities.
DISADVANTAGES OF COMMERCIAL PAPER:
e of Commercial Paper. -by-credit may become necessary.
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CHAPTER 3 –ISSUANCE OF COMMERCIAL PAPER 3.1 ISSUERS OF COMMERCIAL PAPER Issuers can be divided into financial and nonfinancial companies, although most issuers are financial. There are 3 types of finance companies: 1. captive finance companies, 2. bank-related finance companies, 3. independent finance companies. Captive finance companies are subsidiaries of manufacturers, with the purpose of providing financing for the manufacturer. The largest selling of commercial paper—General Motors Acceptance Corporation (GMAC)—is also a captive finance company that provides financing for the customers of General Motors. Other vehicle manufacturers also have captive finance companies to promote the sale of their vehicles. Bank holding companies general use finance companies to cater to customers with weaker credit. Independent finance companies are not affiliated with any other company or bank— hence, the name. Generally, only corporations with the highest credit rating can issue commercial paper. Some companies with weaker credit can get credit enhancements, so that they can issue commercial paper. Asset-backed commercial paper is backed by high quality
collateral. Credit-supported commercial paper is often guaranteed by an organization with excellent credit, such as a bank. Often, a letter of credit is used for this purpose, which is referred to as LOC paper. The bank promises to pay the face value of the paper if the issuer
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doesn't. Though the bank generally charges a fee equal to 1/2 of 1% of the issue, it is still cheaper than obtaining a loan from the bank. Other costs that the issuer must pay are agents' fees to a bank for doing the paperwork necessary to issue commercial paper, and thousands of dollars to have the issue rated by a credit rating organization, such as Standard and Poor's and Moody's. 3.2 ELIGIBILTY TO ISSUE CP
The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore.
The company has been sanctioned working capital limit by bank/s or FIs; and The borrowal account of the company is classified as a Standard Asset by the financing bank/institution.
However, these are risky instruments as they are not backed by assets. So, its investors who are less averse to risk should avoid this. Only blue chip companies, banks, corporation use this. 3.3 PURPOSE OF ISSUANCE While creditworthy corporations can borrow from banks for the prime rate of interest, they may be able to borrow at a lower rate by selling commercial paper. Commercial paper is also sold to provide seasonal and working capital for corporations, to provide bridge financing until longer term securities are sold or until money is expected to be received, such as tax receipts, and to finance the purchase of other securities.CDOs and SIVs, for instance, use commercial paper to finance the purchase of mortgage-backed securities
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(MBSs), profiting from the difference of receiving the higher yield of MBS securities, and paying the lower yield of commercial paper. As an example of bridge financing, a corporation may project that interest rates will be lower in the future, but, for business reasons, may want to finance a project immediately. It can finance the project immediately by issuing commercial paper with a maturity that coincides with the projected lower interest rates. Then it can issue long-term bonds, and use the proceeds to pay for the redemption of the commercial paper. 3.4 ISSUING PROCEDURE
A company planning to issue a commercial paper selects a merchant banker and an Issuing and Paying Agent (IPA) and gets the CP credit rated by an approved credit rating agency. The company then approaches its principal banker with the credit rating certificate for their approval. The banker forwards the application to the RBI for intimation after ascertaining that all the guidelines for the issue of commercial paper are followed.Meanwhile, the merchant banker and the IPA locate clients and obtain their quotes for different maturity periods. The company then takes a final decision on maturity, discount rate and quantum of the issue after consultations with the merchant banker and the IPA. The company can opt for different maturity periods depending upon the span of the CP. If the company plans to issue a CP for six months, it can raise money in tranche with different maturity periods of one, two or three months. In cases where a company decides for a two-month commercial paper, finance has to be raised within a period of two weeks from the date on which the proposal is taken on record by the bank. The company can issue the paper on a single day or in parts on different dates. However the entire issue has to be redeemed on the same day.The proposed issue is to be completed within a period of 2 weeks and the
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banker has to be intimated to reduce the working capital limit to the extent of the amount raised. The company should inform the RBI about the actual amount raised through CP within three days of completion of the issue.Commercial papers cannot be underwritten. The CP holder should present the instrument to the paying agent on maturity. The agent receives brokerage charges for services rendered by him depending upon the maturity period of the CP. In India, commercial papers are open to individuals, financial institutions, corporate and Non-Resident Indians. Non-Resident Indians can only invest on a non-repatriable and non-transferable basis. CPs are issued in multiples of Rs.5 lakhs with a minimum investment of Rs.25 lakhs. ILLUSTRATION
X co.ltd issued commercial paper as per following details:
Date of issue 17th January, 2009 No. of days 90 days
Date of maturity 17th April, 2009 Interest rate 11.25% p.a. What was the net amount received by the company on issue of commercial paper? Let us assume that the company has issued commercial paper worth Rs.10 crores? No of days = 90 days Interest rate = 11.25 % p.a. Interest for 90 days = 11.25% p.a. X 90 days/ 365 days = 2.774% = 10 crores X 2.774 / 100+2.774 = Rs. 26, 99,126 crores = or 0.27 crores Therefore, net amount received at the time of issue = 10 crores – 0.27 crores = Rs. 9.73 crores
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3.5 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.
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 CircularGuidelines 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
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(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
3.6 -RBI GUIDELINES ON ISSUE OF COMMERCIAL PAPER: The summary of RBI guidelines for issue of Commercial paper is given below:
are permitted to raise short term finance through issue of commercial paper, which should be within the umbrella limit fixed by RBI. 18 mercial Paper if:
1. Its tangible net worth is not less than Rs.5 crores as per latest balance sheet.
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2. Working capital limit is obtained from banks/ all India financial institutions, and 3. Its borrowable account is classified as standard asset by banks/ all India financial institutions. specified credit rating agencies like CRISIL, ICRA, CARE, and FITCH. The minimum rating shall be equivalent to P-2 of CRISIL. al paper can be issued for maturities between a minimum of 15 days and a maximum of up to one year from the date of issue. date up to which credit rating is valid. issued in denomination of Rs. 5 lakhs or in multiples thereof.
value). approved by board of directors or limit specified by credit rating agency, whichever is lower. duly taking into account the resource pattern of company‘s financing including commercial papers. The total amount of commercial paper proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription.
provided that in the latter case, each commercial paper shall have the same maturity date.
agent (IPA).
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bed by individuals, banking companies, corporate, NRIs and FIIs. dematerialized form.
al paper should not be underwritten or co-accepted. commercial paper by means of a crossed account payee cheque to the account of the issuer through IPA. mercial paper is held in physical form, the holder of commercial paper shall present the investment for payment to the issuer through IPA. -mat form, the holder of commercial paper will have to get it redeemed through depository and received payment from the IPA. for banks and financial institutions to provide stand-by facility to issuers of commercial paper. al paper, including renewal, should be treated as a fresh issue.
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CHAPTER 4 - COMMERCIAL PAPER MARKET IN INDIA 5.1 INTRODUCTION
In India, on the recommendations of the Vaghul working Group, the RBI announced on 27 th March 1989, that commercial paper will be introduced soon in Indian money market. The recommendations of the Vaghul Working Group on introduction of commercial paper in Indian money market are as flowers: There is a need have limited introduction of commercial paper. It should be carefully planned and the eligibility criteria for the issuer should be sufficiently rigorous to ensure that the commercial paper market develops on healthy lines. Initially, access to the commercial paper market should be registered to rated companies having a net worth of Rs. 5 cores and above with good dividend payment record. The commercial paper market should function within the overall discipline of CAS. The RBI would have to administer the entry on the market, the amount if each issue the total quantum that can be raised in a year. Ni restriction be placed on the commercial paper market except by way of minimum size of note. The size of single issue should not be less than Rs. 1 core and the size of each lot should not be less than Rs. 5 lakhs. Commercial paper should be excluded from the stipulations on insecure advances in the case of banks. Commercial paper would not be tied to any transaction and the maturity period may be 7 days and above but not exceeding six months, backed up if necessary by a revolving underwriting facility of less than three years .The using company should have a net worth of net less than Rs. 5 cores, a debt quality ratio of not more than 105, current ratio of more than 1033, a debt servicing ratio closer to 2, and be listed on the stock exchange. The interest rate on commercial paper would be market dominated and the paper could be issued at a discount to face value or could be interest bearing. Commercial paper should not be subject to stamp duty at the time of issue as well as at the time transfer by endorsement and delivery.
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On the recommendations of the Vaghul Working Group, the RBI announced on 27th March, 1989 that commercial paper will be introduced soon in Indian money market. Detailed guidelines were issued in December 1989, through non-Banking companies (acceptance of Deposits through commercial paper) Direction, 1989 and finally the commercial papers were instructed in India from 1st January, 1990. 4.2 GROWTH IN THE COMMERCIAL PAPER MARKET: Commercial paper was introduced in India in January 1990, in pursuance of the Vaghul Committee‘s recommendations, in order to enable highly rated non-bank corporate borrowers to diversify their sources of short term borrowings and also provide an additional instrument to investors. Commercial paper could carry on an interest rate coupon but is generally sold at a discount. Since commercial paper is freely transferable, banks, financial institutions, insurance companies and others are able to invest their short-term surplus funds in a highly liquid instrument at attractive rates of return. A major reform to impart a measure of independence to the commercial paper market took place when the ‗stand by‘ facility* of the restoration of the cash credit limit andguaranteeing funds to the issuer on maturity of the paper was withdrawn in October 1994. As the reduction in cash credit portion of the MPBF impeded the development of the commercial paper market, the issuance of commercial paper was delinked from the cash credit limit in October 1997. It was converted into a standalone product from October 2000 so as to enable the issuers of the service sector to meet short-termworking capital requirements. Banks are allowed to fix working capital limits after taking into account the resourcepattern of the company‘s finances, including commercial papers. Corporates, PDs andall-India financial institutions (FIs) under specified stipulations have permitted to raiseshort term resources by the Reserve Bank through the issue of commercial papers.
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There is no lock in period for commercial papers. Furthermore, guidelines were issued permitting investments in commercial papers which has enabled a reduction in transaction cost.In order to rationalize the and standardize wherever possible, various aspects of processing, settlement and documentation of commercial paper issuance, several measures were undertaken with a view to achieving the settlement on T+1 basis. For further deepening the market, the Reserve Bank of India issued draft guidelines on securitisation of standard assets on April 4, 2005.Accordingly the reporting of commercial papers issuance by issuing and paying agents(IPAs) on NDS platform commenced effective on April 16, 2005. Activity in thecommercial paper market reflects the state of market liquidity as its issuances tend to rise amidst ample liquidity conditions when companies can raise funds through commercial papers at an effective rate of discount lower than the lending rate of bonds. Banks also prefer investing in commercial papers during credit downswing as the commercial paper rate works out higher than the call rate. Table shows the trends in commercial papers rates and amounts outstanding.
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Table Commercial Papers - Trends in Volumes and Discount Rates
4.3 CHARACTERISTICS OF CP MARKET IN INDIA VIS-À-VIS OTHER MAJOR CP MARKETS IN THE WORLD ISSUERS Initially, only highly rated corporate borrowers were allowed to issue CP to diversify their short-term borrowings. Primary Dealers (PDs) were allowed in this market, subject to fulfilling the eligibility criteria, on April 15, 1997. Thereafter, all-India financial institutions (FIs) that have been permitted to raise short-term resources under umbrella limit fixed by RBI were permitted to issue CP since October 10, 2000. Internationally, there is no restriction on issuers in
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UK. In USA, both financial and nonfinancial issuers are allowed to issue CP. In France, CPs are mainly issued by investment firms, public companies, community institutions and international organisations of which France is a member. MATURITY PERIOD Initially, corporates were permitted to issue CP with a maturity between a minimum of three months and a maximum of upto six months from the date of issue. Since October 18, 1993, the maximum maturity period of CP was increased to less than one year. Subsequently, the minimum maturity period had been reduced from time to time and since May 25, 1998, it was reduced to 15 days. Presently, CP can be issued for maturity period between a minimum of 15 days and a maximum upto one year from the date of issue. As against this, in USA, there is no prescription of minimum and maximum maturity period of CP but for practical matter, it is limited upto 270 days. However, 1-day to 7day CPs is very popular of which 1-day CP constitutes the substantial component of the CP market. In UK also, there is no restriction but in France, initial maturity ranges from 1 day to up to 1 year. CREDIT RATINGS All eligible participants are required to obtain credit rating for issuance of CP from either the Credit Rating Information Services of India Ltd. (CRISIL) or such other credit rating agency (CRA) as approved by the Securities and Exchange Board of India (SEBI) from time to time for the purpose. Initially, the minimum credit rating was stipulated at P1+ of CRISIL. It was softened to P1 of CRISIL or such equivalent rating by other agencies on April 24, 1990 and further to P2 of CRISIL or its equivalent on May 13,
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1992. As of now, the minimum credit rating shall be P2 of CRISIL or its equivalent. In UK, France and USA, rating is not compulsory. However, in US, CPs should generally have the rating of A1/P1 (the highest category) for generating investor interest. LIMITS AND THE AMOUNT OF ISSUE OF CP The entry criteria for issuance of CP have been relaxed considerably over the years. In 1990, a corporate was eligible to issue CP provided the tangible net worth of the company, as per the latest audited balance sheet, was not less than Rs.10 crore. This was reduced to Rs.5 crore on April 24, 1990 and further to Rs.4 crore on October 18, 1993. Also, initially, issuance of CP had to be carved out of the working capital (fund based) limit. Accordingly, in 1990, a company could issue CP upto 20 per cent of its working capital (fund based) limit which was stipulated to be not less than Rs.25 crore. Thereafter, while the working capital limit had been reduced progressively to enable more corporates to issue CP, the amount to be carved out of the working capital limit for issuance of CP was also increased over the years for facilitating the growth of this market. Accordingly, while the working capital (fund based) limit was reduced to "not less than Rs.4" crore on October 18, 1993, the amount of CP that could be issued out of the working capital was also raised upto 100 per cent of the companies' working capital limit of Rs.20 crore or more since June 20, 1996. The organic link of issuance of CP in relation to working capital (fund based) limit was severed on October 10, 2000 when CP was allowed to be issued as a "stand alone" product. The aggregate amount of CP from an issuer, however, has to be within the limit as approved by its Board of Directors or the quantum indicated by the credit rating agency
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for the specified rating, whichever is lower. Banks and FIs, however, have the flexibility to fix working capital limits duly taking into account the resource pattern of companies‘ financing needs including CPs. An FI can issue CP within the overall umbrella limit fixed by the RBI i.e., issue of CP together with other instruments viz., term money borrowings, term deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. In USA and UK, there is no limit on the amount of CP that the entities may issue. DENOMINATION At the time of introduction, with effect from January 1, 1990, it was stipulated that CP may be issued in multiple of Rs.25 lakh and the amount to be invested by a single investor should not to be less than Rs.1 crore (face value). Subsequently, on April 24, 1990, the minimum denomination was reduced to Rs.10 lakh and amount to be invested by a single investor was also reduced to Rs.50 lakh. At present, CP can be issued in denominations of Rs.5 lakh or multiple thereof and amount invested by a single investor should not be less than Rs.5 lakh (face value). internationally, in USA, there is no required minimum size of issue. However, it is usually issued in minimum denomination of $1,00,000. In France, the minimum amount stands at EUR 1,50,000 and in UK, it stands at EUR 40,000. INVESTORS IN THE CP MARKET Initially, it was stipulated that CP can be issued to and held by individuals, banks, companies, other corporate bodies registered or incorporated in India and unincorporated bodies. CP may be issued to a non-resident Indian (NRI) on a nonrepatriation basis and that those CPs shall not be transferable. Also, ForeignInstitutional Investors (FIIs) were added as eligible investors in CP
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market in October2000. However, investment by FIIs would be within the limits set for their investmentsby SEBI . In USA, investors include money market mutual funds, banks, insurance companies and pension funds. DEMATERIALISATION With effect from June 30, 2001, banks, FIs and PDs have been encouraged to make fresh investments and hold CP only in dematerialised form. Outstanding investments in scrip form in the books of banks, FIs and PDs were to be converted into dematerialised form by October 31, 2001.Internationally, in USA and France, CPs are issued in dematerialized form. In UK, fullydematerialized system does not exist though by market convention, Euro CP is issued inthe form of an immobilized global certificate lodged with a central depository e.g., Euroclear/Clearstream.
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4.4 FACTORS HAMPERING GROWTH OF CP MARKET Some of the factors which have hampered active growth of CP market in India are as follows: (i) The linking of CP to working capital limits. Market participants have suggested that CP should be made a "stand alone" product. (ii) At present, for issuance of CP approval or NOC is required from the Financing Banking Company. This NOC/approval is valid for a period of two weeks from the date of its issuance. Furthermore, rating for the issuance of CP has to be current and not more than 2 months old. Market participants perceive these stipulations as impediments to the development of CP market. (iii) The difference in stamp duty rates as between banks and other entities has createdoperational difficulties. There is at present, inter-state disparities as also investor-wise differences in stamp duty rates. Further, there is tenor-wise slab structure of stamp duty as given below:
Tenor
Rate for Banks
Rate for Non Banks 0.125 0.375 0.50
Upto 90 days 91 - 180 days 181 - 364 days
0.05 0.15 0.20
Secondary market transactions in CP, however, do not attract any stamp duty. This divergence in stamp duty for banks and non-banks has created some distortions
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in the market and also encouraged some mal-practices. All primary issues of CP are almost exclusively subscribed to by banks and non-banks buy CP from banks in the secondary market. Further, CP issues with maturity of less than 90 days are generally not preferred. (iv) Procedure to issue CP in physical form is quite cumbersome. The concerned corporates have to arrange for stamping of all the certificates, which is time consuming. Furthermore, copies of all the documents have to be given to all the investors along with the CP certificate. (v) No reliable bench mark is available in the market for pricing CP.
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5 CONCLUSION The commercial paper market has long been viewed as a bastion of high The commercial paper market has long been viewed as a bastion of high liquidity and low risk. But twice during the fi nancial crisis of 2007–2009, the com- liquidity and low risk. But twice during the fi nancial crisis of 2007–2009, the commercial paper market nearly dried up and ceased being perceived as a safe haven. mercial paper market nearly dried up and ceased being perceived as a safe haven. Major interventions by the Federal Reserve, including large outright purchases of Major interventions by the Federal Reserve, including large outright purchases of commercial paper, were eventually used to support both issuers of and investors in commercial paper, were eventually used to support both issuers of and investors in commercial paper. commercial paper.Even though the commercial paper market has experienced disruptions in the Even though the commercial paper market has experienced disruptions in the past, the fi nancial crisis of 2007–2009 was by far the largest decline in the commer- past, the fi nancial crisis of 2007–2009 was by far the largest decline in the commercial paper market, and in contrast to previous turbulent episodes, it mostly affected cial paper market, and in contrast to previous turbulent episodes, it mostly affected commercial paper issued by financial institutions. This crisis has also shown that commercial paper issued by fi nancial institutions. This crisis has also shown that the Federal Reserve is likely to respond aggressively to such a sudden decline of the Federal Reserve is likely to respond aggressively to such a sudden decline of the commercial paper market. In fact, the scale of the Federal Reserve‘s response the commercial paper market. In fact, the scale of the Federal Reserve‘s response was unprecedented—including a blanket guarantee of money market investment was unprecedented—including a blanket guarantee of money market investment worth $3 trillion and direct purchases of commercial paper of up to $370 billion. worth $3
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trillion and direct purchases of commercial paper of up to $370 billion. Such large-scale market interventions raise concerns about future moral hazard of Such large-scale market interventions raise concerns about future moral hazard of commercial paper issuers, independent of whether these guarantees will remain commercial paper issuers, independent of whether these guarantees will remain implicit or not. Financial regulation will need to address the negative incentives implicit or not. Financial regulation will need to address the negative incentives generated by the expectation of future government interventions, either by directly generated by the expectation of future government interventions, either by directly regulating the risk of commercial paper issuers or by charging issuers or investors regulating the risk of commercial paper issuers or by charging issuers or investors for the insurance provided by the government. for the insurance provided by the government.The commercial paper market is far from being fully restored. In fall 2009, The commercial paper market is far from being fully restored. In fall 2009, the Federal Reserve is still in the process of unwinding its purchases of commercial the Federal Reserve is still in the process of unwinding its purchases of commercial paper, the amount of commercial paper outstanding is still quite low, and interest paper, the amount of commercial paper outstanding is still quite low, and interestrate spreads on asset-backed commercial paper are still at their historical highs. rate spreads on asset-backed commercial paper are still at their historical highs. Issuers of commercial paper will remember for some time that commercial paper Issuers of commercial paper will remember for some time that commercial paper was much riskier than they had originally believed. And investors in commercial was much riskier than they had originally believed. And investors in commercial paper will remember for some time that commercial paper turned out to be much paper will remember for some time that commercial paper turned out to be much riskier than they had thought. The high level of skepticism on both
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sides of the riskier than they had thought. The high level of skepticism on both sides of the market for commercial paper suggests that the market will probably diminish market for commercial paper suggests that the market will probably diminish relative to its size before the fi nancial crisis.
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BIBLIOGRAPHY
BOOKS Vshaley & Mittal, Call Money Market, p1.90
WEBSITES www.documento.com www.moneycontrol.com www.rbi.org.com
INTERNET http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=254&Mode=0
http://www.livemint.com/2009/09/02141025/India-call-money-ends-nearrev. html?d=1
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