Growth of Commercial Paper Market in India

D. Aruna Kumar
Assistant Professor (Finance & Accounting Area)
Lokamanya Tilak PG College of Management
Ibrahimpatnam, Hyderabad-501 506

This article proposes to outline the introduction of Commercial Paper (CP)in India, trace its growth, highlight the policy about CP, indicates its volume and some of the broader issues and lays down the concluding remarks.


A working group under the chairmanship of Mr. N. Vaghul was appointed by Reserve Bank of India in September 1986 to study and give recommendations for broad basing the money market and development of money market instruments. The Committee, submitted its report in January 1987, had recommended the introduction of Commercial Paper.

The Reserve Bank of India had, with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowing and also providing an additional instrument to investors, made for the first time a reference to the commercial papers in March 1989 and accordingly, issued detailed guidelines under "Non-Banking Companies (Acceptance of Deposits through Commercial Paper) Directions, 1989" through a notification dated 11th December, 1989 and these Directions were made effective from 1st January, 1990.

Initially, only top rated corporates with tangible net worth of not less than Rs. 10 crore were allowed to issue CP with maturity between 3-6 months from the date of issue. Further, issuance of the CP had to be carved out of the working capital (fund based) limit and it was also stipulated that CP could be issued in multiples of Rs. 25 lakh and the amount to be invested by a single investor should not be less than Rs 1 crore.

Present Guidelines:

Since the inception, these guidelines had been reviewed from time to time (the RBI policy measures were listed in chronological order in Annexure I). The present guidelines are as follows;

Who can Issue? 

Corporates and primary dealers (PDs), and the all-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by Reserve Bank of India are eligible to issue CP. A corporate would be eligible to issue CP provided: (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

Rating Requirement

All eligible participants shall obtain the credit rating for issuance of Commercial Paper from either the 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. or such other credit rating agencies as may be specified by the Reserve Bank of India from time to time, for the purpose. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.


CP can be issued for maturities between a minimum of 7 days and a maximum up to one year from the date of issue.


CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by a single investor should not be less than Rs.5 lakh (face value).

Limits and the Amount of Issue of CP

CP can be issued as a "stand alone" product. The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower. Banks and FIs will, however, have the flexibility to fix working capital limits duly taking into account the resource pattern of companies' financing 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.

Every issue of CP, including renewal, should be treated as a fresh issue.

Who can Act as Issuing and Paying Agent (IPA)

Only a scheduled bank can act as an IPA for issuance of CP.

Investment in CP

CP may be issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India. Banks still continue to be a major player in the CP market. As on November 1,2004, their outstanding investments in CPs amounted to Rs.6,828 crore in the Rs.8500 crore, CP odd market.

Mode of Issuance

CP can be issued either in the form of a promissory note or in a dematerialised form through any of the depositories approved by and registered with SEBI. CP will be issued at a discount to face value as may be determined by the issuer. No issuer shall have the issue of CP underwritten or co-accepted.

CP Issue Expenses

CP is issued at a discount to the face value. The following costs are involved in the issue of CP:

1. Stamp duty

0.2% - If placed through banks
1.0% - If placed through merchant bankers

2. Rating fees*

0.10% (subject to a minimum of Rs.100,000)
(for a rating from CARE)

3. Issuing and paying agent fee


(All charges are on per annum basis and are subject to changes from time to time)

*CARE charges a rating fee of 0.10% of the amount of issue subject to a minimum of Rs.100,000 and a maximum of Rs.30,00,000. For issues above Rs.500 crore, the maximum fee would be Rs.40 lakh

Recent Trends:

Initially, the CP amount outstanding rose from Rs.86 crore as at the end of financial year 1989-90 to Rs. 577 crore as at the end of the year 1992-93 (Table I) and the CP outstanding was declined to Rs.76 crores since typical discount rate was touched to 20.20 – 20.15  in 1995-96.  Following various relaxations in the terms and conditions for issue of CP, CP issuances gathered momentum thereafter and reached Rs. 7,224 crore by end-March 2002.

Chart -I
Commercial Paper Out standing Amount       
( Crores)

During January-October 2003, the market experienced some sluggishness(Chart-I). Issuances of CP have increased in recent period following increasing investment interests seen from mutual funds and cost effectiveness in issuances of CP. Accordingly, the outstanding amount of CP increased substantially from the level of Rs.9,131 crore in March 2004 to Rs. 12,107 crore by December 2004. This is the highest ever level achieved by the CP market since its inception. The reasons for the growth of CP market in recent days are companies are raising funds through CP at interest rates which are close to the rates at which banks lend to the RBI through the daily repo.


Commercial Paper: Outstanding Amount and Range of Discount

Year ended

Total Outstanding

*Rate of Discount(Percent)

1993 March 31


15.76 – 16.00

1994 March 31


11.01 – 12.00

1995 March 31


14.00 – 15.00

1996 March 31


20.20 – 20.15

1997 March 31


11.25 – 12.25

1998 March 31


14.22 – 15.50

1999 March 31


10.05 – 11.50

2000 March 31


10.00 – 12.00

2001 March 31


08.75 – 11.25

2002 March 31


7.41 – 10.25

2003 March 31


6.00 – 7.75

2004 March 31


4.70 – 6.50

 2005 March 31


5.55 – 6.33

* Range of typical effective discount rate per annum during the fortnight.
Source: RBI Bulletins

A couple of better rated corporates have managed to raise 90 days money in the CP market for as low as 5.55%, which is just five basis points above the repo rate and ACC and  L&T are the two players that have raised money at very fine rates in 1994. The sudden spurt in volumes could indicate revival of economic activity. The total outstanding amount as on 30th April 2005 is Rs. 15199 and the effective discount rate per annum during the last fortnight of April 2005 is 5.50-6.65.


The concept of raising money through commercial paper was know to the US markets since 20th century. On our country though it was introduced in 1990, the RBI constantly watching the growth of the CP market and it is modifying the guidelines from time to time. For further development of CP market, the stamp duty on CP should be abolished since there is no  stamp duty in US, UK and France and RBI has to relax the stringent Credit Rating norms from the present Credit rating P2 of CRISIL to P3, since  credit rating is not compulsory in many countries like US, UK and France.The denominations of CP should be reduced further for the growth of secondary market for CP.

Annexure I

Commercial Paper policy changes:


Jan 1990




June 1994






Tangible Net Worth

10 Crore

5 Crore



4 Crore







25 Crore

15 Crore

10 Crore

5 Crore

4 Crore






Minimum Size

1 Crore

50 Lakh

25 Lakh






5 Lakh


Maximum Size

20% of MPBF**


30% of MPBF

75% of MPBF


75% of Cash Credit Compone nt

100% of Cash Credit Compone nt

100% of WCFBL

Should not exceed WCFBL



25 Lakh

10 Lakh

5 Lakh






5 Lakh


Maturity Period

91days - 6 months




3 months – 1year




15 days –  1 year

7days  - One Yr.

Credit Rating

P1+ by CRISIL or Equal grade by other agencies









Other Measures


* Working Capital Fund Based Limit
** Maximum Permissible Bank Finance
Source: Various issues of RBI Bulletin


1. Economic Times: 28.10.2004: ' Repo rattle: Rates may rise for short-term loans to cos.
2. Ronald Vikram D'Mellow, Commercial Paper –as a money market instrument –Chartered Secretary. Vol. No.6, June'90.
3. Sunil Chopra, Commercial Paper Market- Its development in the Indian context –Chartered Accountant, Vol.39/8, February 1991.
4. N.S. Krishnamurthy, The Commercial Paper. Prajnan '95-96, Vol. 24/2.
5. B.S. Bisht. Commercial Paper in USA, Finance India, Vol. 12/4, 1998.
6. Domestic and International Commercial Paper Market in Industrialised countries. Banker, Vol. 39/2, 1992-93.
7. RBI Bulletin

D. Aruna Kumar
Assistant Professor (Finance & Accounting Area)
Lokamanya Tilak PG College of Management
Ibrahimpatnam, Hyderabad-501 506

About the Author:
D.Aruna Kumar, BBM, MCom, MBA, (PhD)
The Author is with Lokamanya Tilak P G College of Management as Assistant Professor in the Department of Business Management in the area of Finance and Accounting. He is working for his PhD on  "New Financing Instruments with
reference to Central Public Enterprises", under the guidance of Prof. R.K.Mishra, Director, Institute of Public Enterprise, Osmania University, Hyderabad-500 007.

Source: E-mail May 12, 2005


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