Regulation of Bank Finance^389
In Japan Yen paper was issued in 1987. It carries maturities ranging from two weeks to
nine months. Normally maturity period varies between 3 months and 4 months.
In Hongkong commercial paper market was opened in 1979 when MTRC (Mass Transit
Railway Corporation) issued CPs. In Singapore CP was intro≠duced for the first time in
1980 when the Singapore merchant bank, DBS Daiwa, issued a CP on behalf of C.I.
to, a Japanese trading company.
Commercial paper in India came into existence in early 1990 following striking
developments in Indian money market. In recent few years, there was unprecedented
transformation in the money market from a highly regulated, narrow illiquid and shallow
market to a highly liberalised, substantially deregulated vibrant market blessed with
new money market instruments. The new monetary policy adopted by the Reserve
Bank of India to update and upgrade the existing money market in India, gave birth to
the 182 days treasury bills, Inter Bank participations, Certificates of Deposits and
Commercial Papers. A highly specialised money market institution, ëDiscount and
Finance House of India Ltd.í, was set-up. Ceiling on the rates in the call money market
was removed. The new financial services market came into existence with a large
number of banks permitted to set-up their subsidiaries for promoting merchant banking,
investment banking, equipment leasing, venture capital finance, etc. It was in the wake
of these developments that CP was launched in our country.
Since the inception of CPs scheme in India in January, 1990,23 companies issued CPs
worth Rs. 419.4 crores (50 issues) till June 30,1991. There has been phenomenal progress
in the CP market in recent years in as much as it rose from Rs. 4,000 crores in December,
1993 to Rs. 9,000 crores in June 1994. Although the maturity period of CPs issued by
the companies varied from three to six months, the majority of CPs were issued with a
maturity of six months. The effective interest rates were in the range of 11.7 to 18.50
per cent.
Regulatory Framework for Commercial Paper
Following the recommendation of the Vaghul Committee on the develop≠ment of the
money market in January, 1987, the RBI announced the broad scheme of CP in its
Credit policy in March, 1989. In January, 1990 the RBI issued detailed guidelines for
the issue of CP. These guidelines were modified in April, 1991.
The major features of these guidelines are:
(i) (a) An issuing company must have a tangible network of atleast Rs. 10
crores.
(b) The company must enjoy a fund-based Working Capital limit of Rs. 10
crores and above.
(c) Have a minimum Current ratio of 1.33:1.