..ditto on the CP maturity front

MID-TERM REVIEW OF ANNUAL POLICY 2004-05/ IMPARTING FLEXIBILITY

In its bid to improve the short-term liquidity management by both banks and non-bank entities, the Reserve Bank of India (RBI) has decided to reduce the minimum maturity period of commercial paper (CP) from 15 days to 7 days with immediate effect.

A CP is an instrument which helps corporates raise short-term finance from banks and other cash-surplus entities, specifically for funding their working capital requirements.

A short-term CP will also make available a quality instrument to investors to park their short-term funds. These investors usually park these funds in treasury bills.

Moreover, the issuing and paying agents (IPA) are required to report the issue of CPs on the RBI's negotiated dealing system platform by the end of the day.

The date of commencement of reporting and standardisation would be finalised in consultation with the market participants, the RBI said.

In order to move towards settlement on a T+1 basis, a group comprising market participants would be constituted to suggest rationalisation and standardisation in respect of processing, settlement and documentation of CP issues.

The decision follows the recommendation of a status paper prepared by RBI a few months back wherein it had suggested phasing out the payment of stamp duty on the placement of a CP.

At present CPs are issued for maturities ranging from 15 days to one year. However, given the stamp duty structure, the paper had suggested there would be incentive on the part of issuers to issue 90-day CPs to minimise the stamp duty cost.

Therefore, with complete phasing out of stamp duty and full fledged real time gross settlement system (RTGS) in place, the maturity period of CPs could be reduced to even one day, the paper said.

However, considering the present situation, it is proposed that the minimum maturity period of CPs could be reduced from 15 days to 7 days and RBI should insist that the maturity period of CPs does not exceed one year from the date of issue.

On the other hand, with the fortnight beginning in January 8, 2005, non-bank participants would be allowed to lend on an average in a reporting fortnight up to 30 per cent of their average daily lending in call/notice money market during 2000-01.

At present non-bank entities could lend on an average in a reporting fortnight up to 45 per cent of their average daily lending in call/notice money market during 2000-01.

This is in line with the initiatives taken by the RBI to move towards pure interbank call money market.

In case a particular non-bank institution has difficulty in developing proper alternative avenues for investment of excess liquidity, the RBI may consider providing temporary permission to lend a higher amount in call/notice money market for a specific period on a case-to-case basis.