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MUMBAI: Indian companies may have raised record high short-term funds through the sale of Commercial Paper (CP) in the last calendar year, but that may fizzle out amid a rise in the interest rate and a roll-back of excess liquidity by the Reserve Bank of India, besides a cap on IPO funding beginning April.

Top-rated firms such as Reliance Industries and non-banking finance companies including Bajaj Finance, Aditya Birla Finance and Tata Capital Financial Services raised Rs 21.97 lakh crore by selling CPs, show data from Primedatabase, an analytics firm. This is an all-time high CP sale in a calendar year.

Private sector NBFCs and financial services including companies accounted for over 47 percent of the total sum, according to Primedatabase. Manufacturing and services companies were the second-highest borrowers via CPs mopping up 25 percent.

“As long as the differential remained considerably high between CP and bank lending rate, top corporates extended tapping this market instrument,” said Soumyajit Niyogi, associate director at India Ratings. “While top companies went for working capital, select non-bank entities raised the bulky amount to fund IPO investments for high networth individuals.”

“This year, the differential may narrow down with changing interest rate scenario.

Commercial papers are short-term debt instruments up to 12-month maturities, generally. Only companies can sell them. The rates are compared with banks’ similar maturity Marginal Cost of Funds based Lending Rates (MCLRs). Any spread of 200 basis points is perceived to be a lure enough for companies tapping CP market.

Treasury Bills, sovereign gauge for shorter duration borrowings, have also yielded 10-49 basis points higher since October’s bi-monthly policy.

“IPO funding was one key trigger for record CP sales last year as financial services companies borrowed very short-term money to lend to individual investors investing in popular IPOs,” said Suvajit Ray, executive vice president at IIFL Securities. “This mechanism will change this year with the capital market regulator capping upper limit of it.”

“Some other form of shorter duration borrowing may partially replace CP sales,” he said.

A regulatory cap related to the IPO fund too will weigh on CP issuances, which could be lower this year. Last quarter, the RBI issued a fresh set of rules for NBFCs. It limits lending to IPO investors to Rs 1 crore per borrower from April 1 this year.

Wealthy investors were seen aggressively borrowing from non-bank lenders only to invest in initial share sales, which mostly delivered handsome gains on the first day of listing. The trend is billed to be posing a systemic risk if share prices slide on the day of listing.

The size of IPO financing depends on oversubscription and issuance size, where HNIs earlier could invest 15% of the issue size, according to a note by India Ratings.

Last year, some top-10 issuers of CP included Indian Oil Corp, Mumbai-based Infina Finance, Reliance Jio Infocomm, NABARD, JM Financial Properties and Reliance Retail Ventures.

In 2020, borrowers sold CPs worth Rs 14.72 lakh crore, two-third of the succeeding year’s total volume.



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