Study On Call Money & Commercial Paper Market

TERM PAPER
ON
STUDY OF CALL MONEY MARKET & COMMERCIAL PAPER MARKET IN

INDIAN MARKET
COURSE: FINANCIAL INSTITUTIONAL SERVICES
COURSE CODE: MGT 523
Submitted To:
Gagandeep Bhatara
Submitted By:
Varun Puri
Reg. No.: 10800464
Lovely School of Business
Lovely Professional University

Contents
Introduction to Money Market ...............................................................................................(1)
 Objectives of Money Market

 History of Indian Money Market
Money Market Instruments .....................................................................................................(3)
Review of Literature ..................................................................................................................(4)
Call Money Market ......................................................................................................................(5)

 Meaning
 Volume of Call Money Market
 Committee Recommendations on Call Money Market
 Participants in the Call Money Market
 Call Money rates
 Prudential Limits
 Reporting Requirements
 The Hows & Whys of the Call Money Market
Commercial Papers .................................................................................................................(13)

 Meaning
 Salient Features
 Advantages / Disadvantages
 Issuance Process
 RBI Guidelines
 Growth in The Commercial Paper Market
 CP Market in India Vs. CP Market in other Parts of World
 Factors Hampering Growth of CP Market
References...................................................................................................................................(25)
Study on Call Money Market &
Commercial Paper Market 1
Introduction- Money Market
Money market refers to the market where money and highly liquid marketable
securities are bought and sold having a maturity period of one or less than one year. It is
not a place like the stock market but an activity conducted by telephone. The money
market constitutes a very important segment of the Indian financial system.
The highly liquid marketable securities are also called as ‘ money market instruments’
like treasury bills, government securities, commercial paper, certificates of deposit, call
money, repurchase agreements etc.
The major player in the money market are Reserve Bank of India (RBI), Discount and
Finance House of India (DFHI), banks, financial institutions, mutual funds, government,
big corporate houses. The basic aim of dealing in money market instruments is to fill the
gap of short-term liquidity problems or to deploy the short-term surplus to gain income
on that.
Definition of Money Market:

According to the McGraw Hill Dictionary of Modern Economics, “money market is
the term designed to include the financial institutions which handle the purchase, sale,
and transfers of short term credit instruments. The money market includes the entire
machinery for the channelizing of short-term funds. Concerned primarily with small
business needs for working capital, individual’s borrowings, and government short term
obligations, it differs from the long term or capital market which devotes its attention to
dealings in bonds, corporate stock and mortgage credit.”
According to the Reserve Bank of India, “money market is the centre for dealing,
mainly of short term character, in money assets; it meets the short term requirements
of borrowings and provides liquidity or cash to the lenders. It is the place where short
term surplus investible funds at the disposal of financial and other institutions and
individuals are bid by borrowers’ agents comprising institutions and individuals and
also the government itself.”
According to the Geoffrey, “money market is the collective name given to the various
firms and institutions that deal in the various grades of the near money.”
So after analyzing the above definitions, we can easily conclude with the following
features of MONEY MARKET.
 Short-term funds are borrowed and lent.

 No fixed place for conduct of operations, the transactions being conducted even
over the phone and therefore, there is an essential need for the presence of well
developed communications system.
 Dealings may be conducted with or without the help the brokers.
 The short-term financial assets that are dealt in are close substitutes for money,
financial assets being converted into money with ease, speed, without loss and
with minimum transaction cost.
 Funds are traded for a maximum period of one year.
 Presence of a large number of submarkets such as inter-bank call money, bill
rediscounting, and treasury bills, etc.
 Short term credit is involve
 Institutions involved in channelizing short term credit
 Concerned with operating needs of financial institutions
 To fulfil short term obligations by government.
 Providing an equilibrium mechanism for ironing out short-term surplus and
deficits.
 Providing a focal point for central bank intervention for the influencing liquidity
in the economy
Objectives of Money Market:

A well developed money market serves the following objectives:
 Providing an equilibrium mechanism for ironing out short-term surplus and

deficits.
 Providing a focal point for central bank intervention for the influencing liquidity
in the economy.
 Providing access to users of short-term money to meet their requirements at a

reasonable price.
History of Indian Money Market:

Till 1935, when the RBI was set up the Indian money market remained highly,
unorganized, shallow, disintegrated, narrow and therefore, very backward. The planned
economic development that commenced in the year 1951 market an important
beginning in the annals of the Indian money market. The nationalization of banks in
1969, setting up of various committees such as the Sukhmoy Chakraborty Committee
(1982), the Vaghul working group (1986), the setting up of discount and finance house
of India ltd. (1988), the securities trading corporation of India (1994) and the
commencement of liberalization and globalization process in 1991 gave a further fillip
for the integrated and efficient development of India money market.
Money Market Instruments

Money market instruments are generally characterized by a high degree of safety of
principal and are most commonly issued in units of $1 million or more. Maturities range
from one day to one year; the most common are three months or less. Active secondary
markets for most of the instruments allow them to be sold prior to maturity. Unlike
organized securities or commodities exchanges, the money market has no specific
location.
Available from financial institutions, money markets give the smaller investor the
opportunity to get in on treasury securities. The institution buys a variety of treasury
securities with the money you invest. The rate of return changes daily, and services such
as check writing may be offered. The major participants in the money market are
commercial banks, governments, corporations, government-sponsored enterprises,
money market mutual funds; futures market exchanges, brokers and dealers.
Investment in money market is done through money market instruments. Money
market instrument meets short term requirements of the borrowers and provides
liquidity to the lenders. Common Money Market Instruments are as follows:
1. Treasury Bills
2. Repurchase Agreements (Repo/Reverse Repo)
3. Call Money
4. Commercial paper
5. Certificate of Deposits
6. Bankers Acceptance
Review of Literature
Article: India call money ends near reverse repo rate, cash ample
Reuters, 2/9/2009, Indian overnight money rates brought down to near the reverse
repo rate of 3.25% on Wednesday as this cash surplus in the system will help banks
meet their reserve needs comfortably. Cheaper money available at the collateralised
borrowing and lending obligation (CBLO) also eased pressure on the inter-bank cash
rates. At that day banks were guided to report their position to RBI once in two weeks.
This amendment crated a expectation on liquidity resistance. Some analysts said the
central bank may start rolling back the liquidity as early as December 2009, as the
already pressured consumer prices could pose significant inflationary threat to the
economy, amid easy cash conditions Overnight rates are supported around the reverse
repo rate because banks holding surplus funds could also deploy the same with central
bank at that rate in its daily liquidity adjustment auctions.
Article: Money Market Integration in India: A Time Series Study
Rastogi Nikhil, Says Indian financial markets have come a long way from the highly
controlled pre-liberalization era. He signifies that the main focus is on achieving
efficiency, which is the hallmark of any developed financial market. This research paper
tests the efficiency and extent of integration between financial markets empirically at
the short end of the market. The rates, mainly taken for the purpose of this study,
comprise the call market rate, CD (Certificate of Deposit) rate, CP (Commercial Paper)
rate, 91-day T-bill (Treasury bill) rate and 3-month forward premium. The results,
though promising, are mixed.in his research he concluded that although markets have
achieved integration in some of its branches, they have still to achieve full integration.
This has absolute implications on the monetary policy of the Reserve Bank of India
(RBI) since changes in one market (gilt market) can be used to regulate the other
market (forex market).
Article: Market efficiency and financial markets integration in India
Prusty Sadananda, June, 2007 The author explored the impact of economic reforms on
the integration of various segments of the financial market in India through the time
series tools during the period from March 1993 to March 2005. The major findings
were: (i) various segments of the financial market in India have achieved market
efficiency, (ii) the 91-day Treasury bill rate is the appropriate 'reference rate' of the
financial sector in India, (iii) the financial markets in India are largely integrated at the
short-end of the market, and (iv) the long-end of the market is integrated with the
short-end of the market. The above findings suggest that monetary policy should rely
more on interest rate and asset price channels to control inflation.
Call /Notice Money-Money Market
Meaning:
Call/Notice money is the money borrowed or lent on demand for a very short period.
When money is borrowed or lent for a day, it is known as Call (Overnight) Money.
Intervening holidays and/or Sunday are excluded for this purpose. Thus money,
borrowed on a day and repaid on the next working day, (irrespective of the number of
intervening holidays) is "Call Money". When money is borrowed or lent for more than a
day and up to 14 days, it is "Notice Money". No collateral security is required to cover
these transactions.
The call/notice money market forms an important segment of the Indian Money Market.
Under call money market, funds are transacted on overnight basis and under notice
money market; funds are transacted for the period between 2 days and 14 days. The
most active segment of the money market has been the call money market, where the
day to day imbalances in the funds position of scheduled commercial banks are eased
out. The call notice money market has graduated into a broad and vibrant institution.
Participants in call/notice money market currently include banks (excluding RRBs) and
Primary dealers both as borrowers and lenders. Non Bank institutions are not
permitted in the call/notice money market with effect from August 6, 2005. The
regulator has prescribed limits on the banks and primary dealers operation in the
call/notice money market.
Call money market is for very short term funds, known as money on call. The rate at
which funds are borrowed in this market is called `Call Money rate'. The size of the
market for these funds in India is between Rs 60,000 million to Rs 70,000 million, of
which public sector banks account for 80% of borrowings and foreign banks/private
sector banks account for the balance 20%. Non-bank financial institutions like IDBI, LIC,
and GIC etc participate only as lenders in this market. 80% of the requirement of call
money funds is met by the nonbank participants and 20% from the banking system.
In pursuance of the announcement made in the Annual Policy Statement of April 2006,
an electronic screen-based negotiated quote-driven system for all dealings in call/notice
and term money market was operationalized with effect from September 18, 2006. This
system has been developed by Clearing Corporation of India Ltd. on behalf of the
Reserve Bank of India. The NDS -CALL system provides an electronic dealing platform
with features like Direct one to one negotiation, real time quote and trade information,
preferred counterparty setup, online exposure limit monitoring, online regulatory limit
monitoring, dealing in call, notice and term money, dealing facilitated for T+0
settlement type for Call Money and dealing facilitated for T+0 and T+1 settlement type
for Notice and Term Money. Information on previous dealt rates, ongoing bids/offers on
re al time basis imparts greater transparency and facilitates better rate discovery in the
call money market. The system has also helped to improve the ease of transactions,
increased operational efficiency and resolve problems associated with asymmetry of
information. However, participation on this platform is optional and currently both the
electronic platform and the telephonic market are co-existing. After the introduction of
NDS-CALL, market participants have increasingly started using this new system more so
during times of high volatility in call rates.
Volumes in the Call Money Market:

Call markets represent the most active segment of the money markets. Though the
demand for funds in the call market is mainly governed by the banks' need for resources
to meet their statutory reserve requirements, it also offers to some participants a
regular funding source for building up short -term assets. However, the demand for
funds for reserve requirements dominates any other demand in the market. Figure 4.1
displays the average daily volumes in the call markets.
Figure 1: Average Daily Volumes in the Call Market (Rs. cr.)
Committee Recommendation on Call Money Market:
The Sukhumoy Chakravarty Committee:

The call money market for India was first recommended by the Sukhumoy Chakravarty
Committee, which was set up in 1982 to review the working of the monetary system.
They felt that allowing additional non-bank participants into the call market would not
dilute the strength of monetary regulation by the RBI, as resources from non-bank
participants do not represent any additional resource for the system as a whole, and
their participation in call money market would only imply a redistribution of existing
resources from one participant to another. In view of this, the Chakravarty Committee
recommended that additional nonbank participants may be allowed to participate in
call money market.
The Vaghul Committee Report:

The Vaghul Committee (1990), while recommending the introduction of a number of
money market instruments to broaden and deepen the money market, recommended
that the call markets should be restricted to banks. The other participants could choose
from the new money market instruments, for their short -term requirements. One of the
reasons the committee ascribed to keeping the call markets as pure inter-bank markets
was the distortions that would arise in an environment where deposit rates were
regulated, while call rates were market determined.
The Narasimham Committee II Report:

The Narasimham Committee II (1998) also recommended that call money market in
India, like in most other developed markets, should be strictly restricted to banks and
primary dealers. Since non- bank participants are not subject to reserve requirements,
the Committee felt that such participants should use the other money market
instruments, and move out of the call markets.
Following the recommendations of the Reserve Banks Internal Working Group (1997)
and the Narasimhan Committee (1998), steps were taken to reform the call money
market by transforming it into a pure interbank market in a phased manner. The non-
banks exit was implemented in four stages beginning May 2001 whereby limits on
lending by nonbanks were progressively reduced along with the operationalisation of
negotiated dealing system (NDS) and CCIL until their complete withdrawal in August
2005. In order to create avenues for deployment of funds by non-banks following their
phased exit from the call money market, several new instruments were created such as
market repos and CBLO.
Various reform measures have imparted stability to the call money market. With the
transformation of the call money market into a pure inter-bank market, the turnover in
the call/notice money market has declined significantly. The activity has migrated to
other overnight collateralized market segments such as market repo and CBLO.
Participants in the Call Money Market:
 As lenders and borrowers: Banks and institutions such as commercial

banks, both Indian and foreign, State Bank of India, Cooperative Banks,
Discount and Finance House of India ltd. (DFHL) and Securities Trading
Corporation of India (STCI).
 As lenders: Life Insurance Corporation of India (LIC), Unit Trust of India
(UTI), General Insurance Corporation (GIC), Industrial Development Bank
of India (IDBI), National Bank for Agriculture and Rural Development
(NABARD), specified institutions already operating in bills rediscounting

market, and entities/corporate/mutual funds.
The participants in the call markets increased in the 1990s, with a gradual opening up of
the call markets to non-bank entities. Initially DFHI was the only PD eligible to
participate in the call market, with other PDs having to route their transactions through
DFHI, and subsequently STCI. In 1996, PDs apart from DFHI and STCI were allowed to
end and borrow directly in the call markets. Presently there are 18 primary dealers
participating in the call markets. Then from 1991 onwards, corporates were allowed to
lend in the call markets, initially through the DFHI, and later through any of the PDs. In
order to be able to lend, corporates had to provide proof of bulk lendable resources to
the RBI and were not suppose to have any outstanding borrowings with the banking
system. The minimum amount corporates had to lend was reduced from Rs. 20 crore, in
a phased manner to Rs. 3 crore in 1998. There were 50 corporates eligible to lend in the
call markets, through the primary dealers. The corporates which were allowed to route
their transactions through PDs, were phased out by end June 2001.
Table: Number of Participants in Call/Notice Money Market
Source: Report of the Technical Group on Phasing Out of Non-banks from Call/Notice
Money Market, March 2001.
Banks and PDs technically can operate on both sides of the call market, though in
reality, only the P Ds borrow and lend in the call markets. The bank participants are
divided into two categories: banks which are pre- dominantly lenders (mostly the public
sector banks) and banks which are pre- dominantly borrowers (foreign and private
sector banks). Currently, the participants in the call/notice money market currently
include banks (excluding RRBs) and Primary Dealers (PDs) both as borrowers and
lenders.
Call Money Rates:

The rate of interest on call funds is called money rate. Call money rates are
characteristics in that they are found to be having seasonal and daily variations
requiring intervention by RBI and other institutions.
The concentration in the borrowing and lending side of the call markets impacts
liquidity in the call markets. The presence or absence of important players is a
significant influence on quantity as well as price. This leads to a lack of depth and high
levels of volatility in call rates, when the participant structure on the lending or
borrowing side alters.
Short-term liquidity conditions impact the call rates the most. On the supply side the
call rates are influenced by factors such as: deposit mobilization of banks, capital
flows, and banks’ reserve requirements; and on the demand side, call rates are
influenced by tax outflows, government borrowing programme, seasonal
fluctuations in credit off take. The external situation and the behaviour of exchange
rates also have an influence on call rates, as most players in this market run integrated
treasuries that hold short term positions in both rupee and forex markets, deploying
and borrowing funds through call markets.
Table 2: Call Money Rates
Source: Handbook of Statistics on Indian Economy, 2005-10, RBI
During normal times, call rates hover in a range between the repo rate and the reverse
repo rate. The repo rate represents an avenue for parking short -term funds, and during
periods of easy liquidity, call rates are only slightly above the repo rates. During periods
of tight liquidity, call rates move towards the reverse repo rate. Table provides data on
the behaviour of call rates. Table: displays the trend of average monthly call rates.
The behaviour of call rates has historically been influenced by liquidity conditions in the
market. Call rates touched a peak of about80% in March 2006-07, reflecting tight
liquidity on account of high levels of statutory pre-emptions and withdrawal of all
refinance facilities, barring export credit refinance.
Prudential Limits:
The prudential limits in respect of both outstanding borrowing and lending transactions
in call/notice money market for banks and PDs are as follows:-
Table : Prudential Limits for Transactions in Call/Notice Money Market
Non-bank institutions are not permitted in the call/notice money market with effect
from August 6, 2005.
Reporting Requirements:
All dealings in call/notice money on screen-based negotiated quote-driven system
(NDS-CALL) launched since September 18, 2007 do not require separate reporting. It is
mandatory for all Negotiated Dealing System (NDS) members to report their call/notice
money market deals (other than those done on NDS-CALL) on NDS. Deals should be
reported within 15 minutes on NDS, irrespective of the size of the deal or whether the
counterparty is a member of the NDS or not. In case there is repeated non-reporting of
deals by an NDS member, it will be considered whether non-reported deals by that
member should be treated as invalid.
The reporting time on NDS is up to 5.00 pm on weekdays and 2.30 pm on Saturdays or

as decided by RBI from time to time.
With the stabilisation of reporting of call/notice money transactions over NDS as also to
reduce reporting burden, the practice of reporting of call/notice/term money
transactions by fax to RBI has been discontinued with effect from December 11, 2004.
However, deals between non-NDS members will continue to be reported to the

Financial Markets Department (FMD) of RBI by fax as hitherto.
The hows and whys of the call money market:
Why does a bank borrow in the call market?

Banks borrow in the call market to meet any temporary shortfall PROBELAM OF
Liquidity funds on any given day. There are mainly two reasons why a bank may face
such a shortfall. Banks normally lend out of the deposits that they mobilize. But there
are temporary gaps, or mismatches. The call money market is used to manage these
gaps.
The second reason is to meet the cash reserve ratio (CRR) which is the cash reserves it
must maintain with the Reserve Bank of India, to meet daily cash needs of the banks’
clientele. In India, banks have to keep 4.5 per cent(it fluctuates with changing economic
conditions) of all their borrowings from the public (in the form of savings and term
deposits) and other banks with RBI. The CRR is calculated on the basis of the bank’s
borrowing or net time and demand liabilities (NDTL), broadly its deposit base, every
alternate Friday. This day is also called the reporting Friday, on which the banks report
their positions to the RBI.
For how long can a bank borrow these funds?

Technically, the call money market is an overnight money market. But a bank can
borrow these funds for one day up to 14 days. Normally, funds are borrowed for one
day, and up to three days on weekends.
How is the rate of interest paid?

The rate of interest is calculated on a daily basis; but the rate quoted in the market is an
annualized one. Once the deal is struck the funds are immediately available to the
borrowing bank and are returned with interest the next day. The funds are lent and paid
back through a banker’s pay order which is cleared by the special high value banker’s
clearing cell in the RBI.
Can the RBI lend in the call market? What does intervention by the central bank
mean?
The RBI is the market regulator and cannot lend or borrow funds in the call market.
However, as a regulator, it can intervene in the market as it did when rates go through
the roof. It intervenes in the market through two market intermediaries – the
Securities Trading Corporation of India and Discount Finance House of India. The
STCI lends funds against the government securities that a bank holds with an offer to
sell back the security (called repurchases or repos), while the DFHI lends funds that it
receives from the central bank against repos of certain securities specified as
eligible for them. The RBI also allows banks to rediscount proceeds of export bills of
exchange.
Why do rates fluctuate? What does this indicate?

The rates fluctuate in the market depending on the demand and supply of money in
the market. High rates indicate a tightness of liquidity position. In India, rates in the call
market are prone to fluctuations and are unidirectional. This is due to the fact that it has
a limited number of players whose needs are similar.
Commercial Papers:
Commercial Paper (CP) is an unsecured money market instrument issued in the form of
a promissory note. It was introduced in India in 1990 with a view to enabling highly
rated corporate borrowers/ to diversify their sources of short-term borrowings and to
provide an additional instrument to investors. Subsequently, primary dealers and
satellite dealers were also permitted to issue CP to enable them to meet their short-
term funding requirements for their operations.
A commercial paper is an unsecured short-term instrument issued by the large banks

and corporations in the form of promissory note, negotiable and transferable by
endorsement and delivery with a fixed maturity period to meet the short-term financial
requirement. There are four basic kinds of commercial paper: promissory notes, drafts,
checks, and certificates of deposit.
It is generally issued at a discount by the leading creditworthy and highly rated
corporates.
Depending upon the issuing company, a commercial paper is also known as “Financial
paper, industrial paper or corporate paper”. Commercial paper was initially meant to be
used by the corporates borrowers having good ranking in the market as established by
a credit rating agency to diversify their sources of short term borrowings at a rate which
was usually lower than the bank’s working capital lending rate.
Commercial papers can now be issued by primary dealers, satellite dealers, and all-
India financial institutions, apart from corporatist, to access short-term funds. Effective
from 6th September 1996 and 17th June 1998, primary dealers and satellite dealers
were also permitted to issue commercial paper to access greater volume of funds to
help increase their activities in the secondary market. It can be issued to individuals,
banks, and companies and other registered Indian corporate bodies and unincorporated
bodies. It is issued at a discount determined by the issuer company. The discount varies
with the credit rating of the issuer company and the demand and the supply position in
the money market. In India, the emergence of commercial paper has added a new
dimension to the money market.
Salient Features
 They are unsecured debts of corporates and are issued in the form of promissory
notes, redeemable at par to the holder at maturity.
 Only corporates who get an investment grade rating can issue CPs, as per RBI
rules.
 It is issued at a discount to face value
 Attracts issuance stamp duty in primary issue
 Has to be mandatorily rated by one of the credit rating agencies
 It is issued as per RBI guidelines
 It’s held in Demat form
 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).
 Issued at discount to face value as may be determined by the issuer.
 Bank and FI’s are prohibited from issuance and underwriting of CP’s.
 Can be issued for a maturity for a minimum of 15 days and a maximum upto one
year from the date of issue.
Figure Commercial Paper Issue Mechanism
Advantage of commercial paper:

 High credit ratings fetch a lower cost of capital.
 Wide range of maturity provides more flexibility.
 It does not create any lien on asset of the company.
 Tradability of Commercial Paper provides investors with exit options.
Disadvantages of commercial paper:

 Its usage is limited to only blue chip companies.
 Issuances of Commercial Paper bring down the bank credit limits.
 A high degree of control is exercised on issue of Commercial Paper.
 Stand-by-credit may become necessary.
Issuance Process of Commercial Paper:

In the developed economies, a substantial portion of working capital requirement
especially those that are short-term, is promptly met through flotation of commercial
paper. Directly accessing market by issuing short-term promissory notes, backed by
stand-by or underwriting facility enables the corporate to leverage its rating to save on
interest costs.
Typically commercial paper is sold at a discount to its face value and is redeemed at face
value. Hence, the implicit interest rate is function of the size of discount and the period
of maturity. Scheduled commercial banks are major investors in commercial paper and
their investment is determined by bank liquidity conditions. Banks prefer commercial
paper as an investment avenue rather than sanctioning bank loan. These loans involve
high transaction costs and money is locked for a longer time period whereas a
commercial paper is an attractive short-term instrument for banks to park funds during
times of high liquidity. Some banks fund commercial papers by borrowing from the call
money market. Usually, the call money market rates are lower than the commercial
paper rates. Hence, banks book profits through arbitraged between the two money
markets. Moreover, the issuance of commercial papers has been generally observed to
be invested related to the money market rates.
Illustration 3.1.
X co.ltd issued commercial paper as per following details:
Date of issue 17th January, 2009 No. of days 90 days
Date of maturity 17th April, 2009 Interest rate 11.25% p.a.
What was the net amount received by the company on issue of commercial paper?
Let us assume that the company has issued commercial paper worth Rs.10 crores?
No of days = 90 days
Interest rate = 11.25 % p.a.
Interest for 90 days = 11.25% p.a. X 90 days/ 365 days = 2.774%
= 10 crores X 2.774 / 100+2.774 = Rs. 26, 99,126 crores
= or 0.27 crores
Therefore, net amount received at the time of issue = 10 crores –
0.27 crores
= Rs. 9.73 crores
RBI Guidelines on Issue of Commercial Paper:

The summary of RBI guidelines for issue of Commercial paper is given below:
 Corporate, primary dealers, satellite dealers and all India financial institutions
are permitted to raise short term finance through issue of commercial paper,
which should be within the umbrella limit fixed by RBI.
 A corporate can issue Commercial Paper if:

1. Its tangible net worth is not less than Rs.5 crores as per latest
balance sheet.
2. Working capital limit is obtained from banks/ all India financial
institutions, and
3. Its borrowable account is classified as standard asset by banks/ all
India financial institutions.
 Credit rating should be obtained by all eligible participants in cp issue from the
specified credit rating agencies like CRISIL, ICRA, CARE, and FITCH. The
minimum rating shall be equivalent to P-2 of CRISIL.
 Commercial paper can be issued for maturities between a minimum of 15 days
and a maximum of up to one year from the date of issue.
 The maturity date of commercial paper should not exceed the date beyond the
date up to which credit rating is valid.
 It can be issued in denomination of Rs. 5 lakhs or in multiples thereof.
 Amount invested by a single investor should not be less than Rs. 5 lakhs (face
value).
 A company can issue commercial paper to an aggregate amount within the limit
approved by board of directors or limit specified by credit rating agency,
whichever is lower.
 Banks and financial institutions have the flexibility to fix working capital limits
duly taking into account the resource pattern of company’s financing including
commercial papers.
 The total amount of commercial paper proposed to be issued should be raised
within a period of two weeks from the date on which the issuer opens the issue
for subscription.
 Commercial paper may be issued on a single date or in parts on different dated
provided that in the latter case, each commercial paper shall have the same
maturity date.
 Every commercial paper should be reported to RBI through issuing and paying
agent (IPA).
 Only a scheduled bank can act as an IPA.
 Commercial paper can be subscribed by individuals, banking companies,

corporate, NRIs and FIIs.
 It can be issued either in the form of a promissory note or in a dematerialised
form.
 It will be issued at a discount to face value as may be determined by the issuer.
 Issue of commercial paper should not be underwritten or co-accepted.
 The initial investor in commercial paper shall pay the discounted value of the
commercial paper by means of a crossed account payee cheque to the account of
the issuer through IPA.
 On maturity, if commercial paper is held in physical form, the holder of
commercial paper shall present the investment for payment to the issuer
through IPA.
 When the commercial paper is held in De-mat form, the holder of commercial
paper will have to get it redeemed through depository and received payment
from the IPA.
 Commercial paper is issued as a ‘stand alone’ product. It would not be obligatory
for banks and financial institutions to provide stand-by facility to issuers of
commercial paper.
 Every issue of commercial paper, including renewal, should be treated as a fresh
issue.
Growth in the Commercial Paper Market:

Commercial paper was introduced in India in January 1990, in pursuance of the Vaghul
Committee’s recommendations, in order to enable highly rated non-bank corporate
borrowers to diversify their sources of short term borrowings and also provide an
additional instrument to investors. Commercial paper could carry on an interest rate
coupon but is generally sold at a discount. Since commercial paper is freely transferable,
banks, financial institutions, insurance companies and others are able to invest their
short-term surplus funds in a highly liquid instrument at attractive rates of return.
A major reform to impart a measure of independence to the commercial paper market

took place when the ‘stand by’ facility* of the restoration of the cash credit limit and
guaranteeing funds to the issuer on maturity of the paper was withdrawn in October
1994. As the reduction in cash credit portion of the MPBF impeded the development of
the commercial paper market, the issuance of commercial paper was delinked from the
cash credit limit in October 1997. It was converted into a standalone product from
October 2000 so as to enable the issuers of the service sector to meet short-term
working capital requirements.
Banks are allowed to fix working capital limits after taking into account the resource
pattern of the company’s finances, including commercial papers. Corporates, PDs and
all-India financial institutions (FIs) under specified stipulations have permitted to raise
short term resources by the Reserve Bank through the issue of commercial papers.
There is no lock in period for commercial papers. Furthermore, guidelines were issued
permitting investments in commercial papers which has enabled a reduction in
transaction cost.
In order to rationalize the and standardize wherever possible, various aspects of

processing, settlement and documentation of commercial paper issuance, several
measures were undertaken with a view to achieving the settlement on T+1 basis. For
further deepening the market, the Reserve Bank of India issued draft guidelines on
securitisation of standard assets on April 4, 2005.
Accordingly the reporting of commercial papers issuance by issuing and paying agents
(IPAs) on NDS platform commenced effective on April 16, 2005. Activity in the
commercial paper market reflects the state of market liquidity as its issuances tend to
rise amidst ample liquidity conditions when companies can raise funds through
commercial papers at an effective rate of discount lower than the lending rate of bonds.
Banks also prefer investing in commercial papers during credit downswing as the
commercial paper rate works out higher than the call rate. Table shows the trends in
commercial papers rates and amounts outstanding.
Table Commercial Papers - Trends in Volumes and Discount Rates.
Characteristics of CP Market in India vis-à-vis Other Major CP Markets in the

World
Issuers
Initially, only highly rated corporate borrowers were allowed to issue CP to diversify
their
short-term borrowings. Primary Dealers (PDs) were allowed in this market, subject to
fulfilling the eligibility criteria, on April 15, 1997. Thereafter, all-India financial
institutions (FIs) that have been permitted to raise short-term resources under
umbrella limit fixed by RBI were permitted to issue CP since October 10, 2000.
Internationally, there is no restriction on issuers in UK. In USA, both financial and
nonfinancial issuers are allowed to issue CP. In France, CPs are mainly issued by
investment firms, public companies, community institutions and international
organisations of which France is a member.
Maturity Period
Initially, corporates were permitted to issue CP with a maturity between a minimum of
three months and a maximum of upto six months from the date of issue. Since October
18, 1993, the maximum maturity period of CP was increased to less than one year.
Subsequently, the minimum maturity period had been reduced from time to time and
since May 25, 1998, it was reduced to 15 days. Presently, CP can be issued for maturity
period between a minimum of 15 days and a maximum upto one year from the date of
issue.
As against this, in USA, there is no prescription of minimum and maximum maturity

period of CP but for practical matter, it is limited upto 270 days. However, 1-day to 7-
day CPs is very popular of which 1-day CP constitutes the substantial component of the
CP market. In UK also, there is no restriction but in France, initial maturity ranges from
1 day to up to 1 year.
Credit Ratings
All eligible participants are required to obtain credit rating for issuance of CP from
either the Credit Rating Information Services of India Ltd. (CRISIL) or such other credit
rating agency (CRA) as approved by the Securities and Exchange Board of India (SEBI)
from time to time for the purpose. Initially, the minimum credit rating was stipulated at
P1+ of CRISIL. It was softened to P1 of CRISIL or such equivalent rating by other
agencies on April 24, 1990 and further to P2 of CRISIL or its equivalent on May 13,
1992. As of now, the minimum credit rating shall be P2 of CRISIL or its equivalent.
In UK, France and USA, rating is not compulsory. However, in US, CPs should generally
have the rating of A1/P1 (the highest category) for generating investor interest.
Limits and the Amount of Issue of CP

The entry criteria for issuance of CP have been relaxed considerably over the years. In
1990, a corporate was eligible to issue CP provided the tangible net worth of the
company, as per the latest audited balance sheet, was not less than Rs.10 crore. This
was reduced to Rs.5 crore on April 24, 1990 and further to Rs.4 crore on October 18,
1993. Also, initially, issuance of CP had to be carved out of the working capital (fund
based) limit. Accordingly, in 1990, a company could issue CP upto 20 per cent of its
working capital (fund based) limit which was stipulated to be not less than Rs.25 crore.
Thereafter, while the working capital limit had been reduced progressively to enable
more corporates to issue CP, the amount to be carved out of the working capital limit for
issuance of CP was also increased over the years for facilitating the growth of this
market. Accordingly, while the working capital (fund based) limit was reduced to "not
less than Rs.4" crore on October 18, 1993, the amount of CP that could be issued out of
the working capital was also raised upto 100 per cent of the companies' working capital
limit of Rs.20 crore or more since June 20, 1996.
The organic link of issuance of CP in relation to working capital (fund based) limit was
severed on October 10, 2000 when CP was allowed to be issued as a "stand alone"
product.
The aggregate amount of CP from an issuer, however, has to 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, however, have the flexibility
to fix working capital limits duly taking into account the resource pattern of companies’
financing needs 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.
In USA and UK, there is no limit on the amount of CP that the entities may issue.
Denomination
At the time of introduction, with effect from January 1, 1990, it was stipulated that CP
may be issued in multiple of Rs.25 lakh and the amount to be invested by a single
investor should not to be less than Rs.1 crore (face value). Subsequently, on April 24,
1990, the minimum denomination was reduced to Rs.10 lakh and amount to be invested
by a single investor was also reduced to Rs.50 lakh. At present, CP can be issued in
denominations of Rs.5 lakh or multiple thereof and amount invested by a single investor
should not be less than Rs.5 lakh (face value).
Internationally, in USA, there is no required minimum size of issue. However, it is

usually issued in minimum denomination of $1,00,000. In France, the minimum amount
stands at EUR 1,50,000 and in UK, it stands at EUR 40,000.
Investors in the CP Market

Initially, it was stipulated that CP can be issued to and held by individuals, banks,
companies, other corporate bodies registered or incorporated in India and
unincorporated bodies. CP may be issued to a non-resident Indian (NRI) on a non-
repatriation basis and that those CPs shall not be transferable. Also, Foreign
Institutional Investors (FIIs) were added as eligible investors in CP market in October
2000. However, investment by FIIs would be within the limits set for their investments
by SEBI.
In USA, investors include money market mutual funds, banks, insurance companies and
pension funds.
Dematerialisation
With effect from June 30, 2001, banks, FIs and PDs have been encouraged to make fresh
investments and hold CP only in dematerialised form. Outstanding investments in scrip
form in the books of banks, FIs and PDs were to be converted into dematerialised form
by October 31, 2001.
Internationally, in USA and France, CPs are issued in dematerialized form. In UK, fully
dematerialized system does not exist though by market convention, Euro CP is issued in
the form of an immobilized global certificate lodged with a central depository e.g.,
Euroclear/Clearstream.
Factors Hampering Growth of CP Market

Some of the factors which have hampered active growth of CP market in India are as
follows:
(i) The linking of CP to working capital limits. Market participants have
suggested that CP should be made a "stand alone" product.
(ii) At present, for issuance of CP approval or NOC is required from the
Financing Banking Company. This NOC/approval is valid for a period of
two weeks from the date of its issuance. Furthermore, rating for the
issuance of CP has to be current and not more than 2 months old. Market
participants perceive these stipulations as impediments to the
development of CP market.
(iii) The difference in stamp duty rates as between banks and other entities
has created operational difficulties. There is at present, inter-state
disparities as also investor-wise differences in stamp duty rates. Further,
there is tenor-wise slab structure of stamp duty as given below:
Tenor Rate for
Banks Non-banks
Upto 90 days 0.05 0.125
91 - 180 days 0.15 0.375
181 - 364 days 0.20 0.50
Secondary market transactions in CP, however, do not attract any stamp duty.
This divergence in stamp duty for banks and non-banks has created some distortions
in the market and also encouraged some mal-practices. All primary issues of CP are
almost exclusively subscribed to by banks and non-banks buy CP from banks in
the secondary market. Further, CP issues with maturity of less than 90 days are
generally not preferred.
(iv) Procedure to issue CP in physical form is quite cumbersome. The
concerned corporates have to arrange for stamping of all the certificates,
which is time consuming. Furthermore, copies of all the documents have
to be given to all the investors along with the CP certificate.
(v) No reliable bench mark is available in the market for pricing CP.
References
Research Paper:
 Ghosh and Bhattacharyya, Spread, Volatility and Monetary Policy: Emprical
Evidences from the Indian Overnight Money Market,pg1
Books
 Vshaley & Mittal, Call Money Market, p1.90
Internet
 http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=254&Mode=0
 http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=254&Mode=0
 http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=179
 http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=179
 http://www.livemint.com/2009/09/02141025/India-call-money-ends-near-
rev.html?d=1
 http://findarticles.com/p/articles/mi_m1TSD/is_1_6/ai_n25012617/

Study On Call Money & Commercial Paper Market

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Study On Call Money & Commercial Paper Market

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TERM PAPER

STUDY OF CALL MONEY MARKET & COMMERCIAL PAPER MARKET IN

COURSE: FINANCIAL INSTITUTIONAL SERVICES

COURSE CODE: MGT 523

Reg. No.: 10800464

Lovely School of Business

Lovely Professional University

Introduction to Money Market ...............................................................................................(1)

 Objectives of Money Market

Money Market Instruments .....................................................................................................(3)

Review of Literature ..................................................................................................................(4)

Call Money Market ......................................................................................................................(5)

Commercial Papers .................................................................................................................(13)

Introduction- Money Market

Definition of Money Market:

 Short-term funds are borrowed and lent.

Objectives of Money Market:

 Providing an equilibrium mechanism for ironing out short-term surplus and

 Providing access to users of short-term money to meet their requirements at a

History of Indian Money Market:

Money Market Instruments

2. Repurchase Agreements (Repo/Reverse Repo)

Article: Money Market Integration in India: A Time Series Study

Article: Market efficiency and financial markets integration in India

Call /Notice Money-Money Market

Volumes in the Call Money Market:

Figure 1: Average Daily Volumes in the Call Market (Rs. cr.)

Committee Recommendation on Call Money Market:

The Sukhumoy Chakravarty Committee:

The Vaghul Committee Report:

The Narasimham Committee II Report:

Participants in the Call Money Market:

 As lenders and borrowers: Banks and institutions such as commercial

(NABARD), specified institutions already operating in bills rediscounting

Table: Number of Participants in Call/Notice Money Market

Call Money Rates:

Table 2: Call Money Rates

Source: Handbook of Statistics on Indian Economy, 2005-10, RBI

The reporting time on NDS is up to 5.00 pm on weekdays and 2.30 pm on Saturdays or

However, deals between non-NDS members will continue to be reported to the

The hows and whys of the call money market:

Why does a bank borrow in the call market?

For how long can a bank borrow these funds?

How is the rate of interest paid?

Why do rates fluctuate? What does this indicate?

A commercial paper is an unsecured short-term instrument issued by the large banks

Figure Commercial Paper Issue Mechanism

Advantage of commercial paper:

Disadvantages of commercial paper:

Issuance Process of Commercial Paper:

RBI Guidelines on Issue of Commercial Paper:

 A corporate can issue Commercial Paper if:

 Commercial paper can be subscribed by individuals, banking companies,

Growth in the Commercial Paper Market:

A major reform to impart a measure of independence to the commercial paper market

In order to rationalize the and standardize wherever possible, various aspects of

Table Commercial Papers - Trends in Volumes and Discount Rates.

Characteristics of CP Market in India vis-à-vis Other Major CP Markets in the

As against this, in USA, there is no prescription of minimum and maximum maturity

Limits and the Amount of Issue of CP

Internationally, in USA, there is no required minimum size of issue. However, it is

Investors in the CP Market

Factors Hampering Growth of CP Market