Commercial Paper Market in India

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Case Details:

Case Code : FINC070
Case Length : 21 pages
Period : 2009-2010
Pub. Date : 2011
Teaching Note : Available
Organization : Financial Market
Industry : Financial Market
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Volumes of commercial papers will increase because it will be cheaper for companies to raise money through this route rather than loans from banks." 1

- Paritosh Kashyap,, in March 2010


The base rate system which came into force on July 1, 2010, in India brought about drastic changes in the Commercial Paper2 (CP) market in the country. Under this system, banks were not supposed to lend below the base rate. Market analysts noted, "The introduction of the so-called base rate, below which no bank could lend since July 2010, would give a leg up to the commercial paper market in India. Corporations and Non-Banking Finance Companies 3 (NBFCs) would prefer to utilize the CP for short-term funding needs"4. Under base rate system,the cost of commercial paper worked out to be cheaper than the bank borrowing rate as the borrowers were no longer in a position to negotiate on the lending rate with banks.

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1] Joel Rebello and Anup Roy, "Base Rate System may Drive Firms to Commercial Paper,", May 17, 2010
2] The Reserve Bank of India (RBI) allowed operation of this instrument in 1990. The Reserve Bank of India was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta (now Kolkata) but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, after nationalization in 1949, the Reserve Bank is fully owned by the Government of India. It is the central bank of India. It monitors all the financial functions of the country very closely. Being the central bank of the country, it reviews monetary and fiscal policies time to time, also implementing them into the system very effectively as and when required.
3] NBFCs backed by big groups such as Tatas, Bajaj and ICICI. NBFCs are registered under the Companies Act, 1956, and are concerned with acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of such as marketable nature, leasing, hire-purchase, insurance business, chit business, and also the dealing with the loans and advances. However, they do not operate their business in agriculture activity, industrial activity, and sale/purchase/construction of immovable property..
4] Joel Rebello and Anup Roy, “Base Rate System may Drive Firms to Commercial Paper,”, May 17, 2010.

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