Commercial paper market on a roll

Commercial paper (CP) issuances are on the rise. Total outstanding amount of new issues has gone up by 53.5 per cent to Rs 10,910 crore as on June 30, 2004, from Rs 7,108 crore as on June 30, 2003, according to the latest Weekly Statistical Supplement of the Reserve Bank of India (RBI).

During the fortnight ended on June 30, 2004, Rs 1,094 crore was raised through CPs at discount rates in the range of 4.60-4.20 per cent, compared with Rs 1,024 crore mopped up at 4.50-6.05 per cent in the previous fortnight ended on June 15, 2004.

A dealer with a public sector bank said news issues worth Rs 1,000 crore are likely to hit the market by August. In July alone five corporates will tap this market.

The rise in CP issuances is due to the rising interest from mutual funds, which have got new guidelines from the Securities and Exchange Board of India on investments in non-SLR debt securities.

Mutual funds, which are the main investors in this market, are only the investment vehicles through which a retail investor can invest in this market.

Mutual funds are parking most of their surplus cash in CPs as they are yielding better returns than any other short-term money market instruments currently.

"Returns from CPs are at around 4.70 to 4.90 per cent, higher than one-year treasury bill (4.60 per cent), call money (4.50 per cent) and repos (4 per cent)," said a dealer with a private bank.

Moreover, for corporates, the costs associated with a CP issuance are at present lower vis-a-vis bonds and fixed deposits, said the treasury head of a private sector bank. "Reduction in stamp duty on CPs since March this year has also boosted the market."

"CPs are an attractive proposition for corporates as it brings down the cost of funds substantially," said Rajesh Mokashi, executive director, Credit Analysis & Research Ltd.

"The savings could be as high as three per cent vis-a-vis bank funding, which costs around eight per cent currently," he added.

Century textiles, Gruh Finance, United Phosphorus, Madras Alluminium Company (Malco) and Gammon India are likely to tap the market before July-end.

Pidilite Industries, Garden Silk Mills Ltd, Godrej and Boyce, Apollo Tyres, IL&FS, GE Capital Services, Gammon India, Indoco Remedies, Magma Leasing, Supreme Industries, Sundaram Finance and Lafarge India have already floated their issues this year.

These corporates have raised raised funds at discount rates ranging from 4.60 per cent to 4.90 per cent. In some cases the rate has been as high as 5.10 per cent.