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(^392) Financial Management
As a corollary to this, a commitment fee of 1. 5 to 2 per cent on the utilised cash credit
limits on the unutilised cash credit limits will be added to the cost of funds being raised
through commercial papers offsetting, to some extent, the lowered interest rate on CP.
Further, the issuing companies will now no longer have banksí funds as stand-by facility
and they can no longer place reliance on the banksí working capital limits to meet the
liability on maturity of CPs. Under the circumstances CPs will continue to be issued but
will be restricted only to good companies with inherent strength.
Although CPs have made a good start, its future will depend on a number of factors.
First such factor is conditionalities imposed on issue of CPs. Too many restrictions
presently clamped on issuing companies are likely to kill the potentiality of CP as a
source of corporate financing. For instance, companies in India do not have the discretion
about the timing of CP issues and their roll overs. It is the RBI which decides in these
matters. Further, the companies would find it impossible to roll over the CP issue in
view of the queue system operated by RBI for CP issues. For instance, CP issue by a
company is dated 1lth March, 1991. After six months, the instrument matures and the
company has to get into the queue system for the next CP issue. The stipulation that
only companies rated PI are eligible to issue CPs is much too harsher. There are some
good companies with PI rating who have been deprived of opportunities to issue CP.
The highly rigid liquidity norms do ensure impeccable quality standards but they suffocate
the growth. For commercial paper market to grow, issuers must have option to offer
CPs with attractive terms including maturity range, denominational range and interest
rate range. Indian CP as such is not going to attract investors of varied notions and
preferences. The minimum time limit of 3 months does not seem to be short enough and
funds will unnecessarily be tied. It is felt that the inactivity period should be as less as
15 days. It would indeed be a milestone in corporate financing if a tax exempt commercial
paper is introduced in the market. Such paper could be issued by public sector
undertakings, mutual funds, all-India financial institutions etc. Further the short-term
paper through regular roll overs can ensure regular supply of funds.
The RBI should explore the possibility of opening the door of the commercial paper
market to international investors on the same lines as offshore mutual funds. Initially
the profitable public sector undertakings may be allowed to issue foreign currency
denominated paper only to international institutions, pension funds, provident funds and
development banks.
In sum, commercial paper as an instrument of corporate finance has tremendous scope
if structural rigidities are removed and only such regulatory measures are taken by the
RBI as are justifiable to issuers, investors, dealers and other concerned parties to the
paper.