New commercial paper guidelines in the works

The Reserve Bank of India (RBI) plans to review the guidelines for issuing commercial papers (CPs). CP issuances are expected to rise under the base rate regime.

Corporate houses issue CPs to raise funds from banks as CP rates are lower than the prevailing lending rates. This is because the instrument is tradable. CP issuances have surged since the advent of the new loan pricing regime, base rate, from July 1. Banks have been barred from lending below their base rates.

Speaking at a press conference to discuss the central bank’s annual report for 2009-10, RBI Deputy Governor Shyamala Gopinath said: “We are in the process of reviewing the guidelines in consultation with market participants.”

With the base rate system, CPs have became the flavour of the day for banks, as they found an avenue to deploy funds for returns that are lower than their base rates Most banks’ base rates are between seven per cent and 8.25 per cent. According to RBI data, companies have reported Rs 11,680 crore worth of issuances in the first two weeks of July, while between April 15 and June 30, the issuances had risen by Rs 16,627 crore.

According to Gopinath, CP issuances are going to rise in the future, mainly because of the base rate regime. The norms needed to be reviewed as the existing ones were issued at least a couple of years ago. However, she said RBI was not averse to more CP issuances.

“Our concern is not so much the existing guidelines on ratings but that these guidelines were framed a couple of years ago. In the changed situation, when the base rate has come, there is a possibility of more such issues,” said Gopinath.

On whether RBI was concerned about the end use of CP funds, Gopinath said: “This issue did come up in an earlier meeting. For all issuances of longer-term instruments, the companies have to disclose the reasons for which the funds are used. The issue which came up is that whether some form of disclosure should be there. That is yet to be discussed with the market participants.”

Bankers said the scrutiny of the background and the prospective use of funds by companies raising money through CPs was less stringent when compared to the strict checks banks did while giving loans.