Companies opt for CPs to save costs

Companies are substituting working capital loans from banks with short-term funds raised through the issue of commercial papers (CP) in one-on-one deals with mutual funds, to save on interest costs.

Companies avoid selling commercial papers to banks because their procedural requirements such as exposure limits to corporate groups, board approvals and involvement of brokers, increase the costs.

Companies which are active in raising funds through bilateral deals with mutual funds are Omax, Alok Industries, Supreme Industries, Rei Agro, Gotz India and Raymond Industries. 

BETTER OPTION CP Issued by companies (Rs crore)
Fortnight ended	Total amount outstanding	Reported during the fortnight
October 15, '06	23,521	1,733
January 15, '07	23,758	1,255
April 15, '07	19,013	1,952
July 15,'07	28,129	4,200
July 31, '07	30,631	6,346
August 15, '07	31,784	3,823

Some of the non banking finance companies active in raising funds through the CP route are Mahindra and Mahindra, Tata Sons and Tata Motors. Funds come cheap as the interest rates on three and six month funds have come down by 50-60 basis points in a month's time.

Some companies are using funds raised through the CP route for their longer term requirements. But companies and banks are yet to take a call on long term borrowings as the interest rates have gone up overseas and the RBI has capped the use of dollar funds for rupee expenditure.

They are waiting for cues on interest rates from the RBI's second quarterly review of the monetary policy on October 30.

Banks which have put their long term borrowing plans on hold include Syndicate Bank, Punjab National Bank, Bank of Baroda and Canara Bank. The State Bank of India had raised 10-year funds through perpetual bonds at the rate of 10.10 per cent and these are currently trading at 9.75 per cent, according to dealers.

Ample liquidity and trading interest by foreign banks have pushed down the yields in the short-term market, especially CPs and certificate of deposits (CDs). These banks are of the view that demand for corporate bonds may go up due to high interest rate differential compared with government bonds.

The demand for corporate bonds will go up further as the outlook on government securities is bearish. The market expects the yields on government papers to go up, at least in case of shorter-term bonds, due to over supply.