Issue of Commercial Papers: SECP setting up minimum requirements

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The Securities and Exchange Commission of Pakistan (SECP) is setting up minimum requirements/conditions for issuance of Commercial Papers (CPs), ie, short-term debt instruments issued by top-rated corporates to meet their short-term financial needs including working capital. In this regard, the SECP here on Monday sought public opinion on the draft Issue of Commercial Papers Regulations, 2013, aimed at promoting the corporate debt market and to facilitate the corporates to raise fund from the capital market through the issue of Commercial Papers (CPs).

Through the draft Commercial Papers Regulations, 2013, the SECP has laid down conditions for issue of Commercial Paper. Any company or body corporate can issue Commercial Paper if it fulfils the following conditions. Firstly, it is authorised by its Articles of Association or other constitutive document to issue Commercial Papers. Secondly, its equity is not less than Rs 25 million as per the latest audited balance sheet.

Thirdly, it has obtained the entity credit rating from a Credit Rating Company and such rating is not less than "A-" (medium to long-term) and "A2" (short-term) and more than twelve months old and it has no overdue loans or defaults in the report obtained from the Credit Information Bureau of the State Bank of Pakistan and the said report is not more than two months old.

The CP is a short-term debt instrument normally issued by highly rated corporates to meet their short-term financial needs like working capital etc. A total of 33 CPs have been issued so far in aggregate amounting to Rs 16 billion. These CPs were issued under the Guidelines for the Issue of Commercial Papers by the SECP on October 28, 2002. The CPs can be issued through private placement to persons mentioned in section 120 of the Companies Ordinance, 1984, and notified there under or may be issued to the general public through prospectus, SECP said.

As per draft rules, the Commercial Paper shall be issued for maturities between minimum of 30 days and maximum of one year and the date of maturity shall be reckoned from the first day of subscription. Provided that maturity date of Commercial Paper shall not go beyond the date up to which the credit rating of the issuer is valid. Where the maturity date happens to be a holiday, the issuer shall make payment on the immediate following working day.

The size of an issue of Commercial Paper shall not be less than Rs 10 million and denomination of a Commercial Paper shall be its face value. Where Commercial Paper is issued through private placement it can be issued in denomination of Rs 100,000 or in multiples thereof and where Commercial Paper is issued to general public it can be issued in denomination of Rs 25,000 or multiples thereof.

The aggregate amount of a Commercial Paper raised by an issuer shall be within such limits as may be approved by its Board of Directors in accordance with the prudential regulations of the State Bank of Pakistan or the quantum indicated by the Credit Rating Company concerned, whichever is lower.

The Commercial Paper shall be in the form of a promissory note which may be issued in physical and/or scrip less form at such discount to face value as may be determined by the issuer keeping in view the prevailing interest rates such as interest rate on Treasury Bills (T-Bills) and the Karachi InterBanks Offered Rate (KIBOR), etc and its credit rating.

The issuer shall bear all the expenses relating to the issue of the Commercial Paper including the fees payable to the Issuing and Paying Agent and the Credit Rating Company concerned, and the stamp duty payable to the concerned provincial government under the Stamp Act, 1899 at the rates prescribed by them and any other relevant charges connected with such issue, draft Commercial Papers Regulations, 2013, added.

Sources told Business Recorder the main features of the proposed draft Regulations issued by the SECP are: Firstly, setting up of minimum requirements/conditions for issue of a CPs. Secondly, insertion of the concept of issuance of CPs under the Shelf-Registration process. Thirdly, duties and responsibilities of the issuer, IPA and Credit Rating company.

Fourthly, omission of the requirements for having minimum current ratio and the debt equity ratio by the issuer. Fifthly, restriction of the issue of CP through private placement only to Qualified Institutional Buyers. Sixthly, procedure for transfer of CP and issue of duplicate CP and insertion of a penalty clause, they added.

According to the SECP, in case of offer through private placement approval of the SECP is not required; however, in case of offer to the general public, the prospectus has to be approved by the SECP under Section 57 of the Ordinance before issue, circulation and publication.

The CP regulations stipulates the minimum conditions for issue of CPs, minimum and maximum maturity (between 30 to 365 days), size, denomination, mode and procedure for issue of CPs. The regulations allow an issuer to issue the CPs under the shelf registration process wherein an issuer can issue CPs in tranches over a period of time as soon as it needs fund provided that full Shelf Registration Plan is disseminated among the investors.

Under the CP regulations an issuer may opt for early redemption or role-over of the issue but subject to the conditions set in the CP regulations. The regulations also define the duties and responsibilities of the issuer, issuing and paying agent (IPA) and the credit rating company. The IPAs which may be a scheduled bank, an investment finance company or a development financial institution plays an important role in the issue of the CP. Its role includes adherence to the requirements of the CP Regulations by the issuer, marketing/placement/distribution of CPs, redemption of CP and reporting of the CP issue to the SECP.

The CP regulations will repeal the existing Guidelines for the Issue of Commercial Papers issued by the SECP on October 28, 2002. Comments/suggestions, if any, received from any person on the said draft CP Regulations within a period of 30 days of the publication of the same in the official gazette shall be taken into consideration by the SECP.

In addition to its publication in the official gazette, the CP Regulations have also been placed on the SECP''s website for public comments at the public discussion forum (DF) at the link The public/stakeholders may give their comments on the said CP Regulations through the said DF as well. The final CP Regulations will be notified after receipt of public comments, within the time period mentioned above and their consideration by the SECP, SECP added.

When asked to explain the CP, sources said that the CP is a debt instrument issued by companies in the form of promissory note for financing their short term needs like working capital requirements. It is usually issued at a discount to face value reflecting prevailing market interest rates and the credit rating of the issuer. A sizeable CP market serves as an anchor for the corporate bond market of a country. The investors in CPs mostly include banks and other financial institutions; therefore, the State Bank of Pakistan (SBP) on August 23, 2003 has also issued guidelines on Commercial Papers.

The stakeholders, from time to time, have complained about certain difficulties being faced by them while complying with regulators like SECP''s guidelines for issue of CPs. Problems faced by stakeholders mainly include inconsistencies in certain clauses of both the guidelines and difficulties in compliance with some clauses which are not so relevant. In order to address problems faced by the Issuers and the Issuing and Paying Agents (IPA), SECP held a meeting with SBP wherein, it was agreed that a joint letter be sent to the stakeholders (Issuers/IPAs/Consultants) in order to seek their comments/feedback so as to identify the areas which need improvement.

Courtesy: Business Recorder

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