Commercial papers, the newest debt instrument

Commercial papers, which are short-term unsecured promissory notes, is the newest debt instrument companies can issue to meet  their short-term financing by raising the funds from other institutions and the public.

The guideline for public issue of commercial papers was issued recently for implementation. Druk Holding and Investments (DHI) is the first corporate entity to issue commercial papers worth Nu 870 million.

Royal Securities Exchange Ltd (RSEBL) CEO, Dorji Phuntsho, said that companies issue commercial papers typically for the financing of accounts receivable and inventories.

For instance, if a company needs to finance a project or pay its employees but is running out of cash, the company can issue commercial papers promising the buyer a return with interest upon maturity.

A commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates. It is similar to bonds as both are debt instruments but maturity for bonds is usually more than a year while maturity for a commercial papers are less than a year.

The DHI issued its commercial paper on March 18 and it will mature on April 24, with an interest rate  between 2-5 percent.

The RSEBL would provide the platform for such trade and act as a payment agent. The CEO also said that RSEBL would remind both the subscribers and issuers prior to three working days.

The company registry division of the Department of Industry has come up with a guideline for eligibility and due process.

All incorporated companies including the financial institutions are permitted to raise short term finances through issuance of commercial papers provided the net worth of the company is not less than Nu 5 million as per the latest audited balance sheet and is backed by collateral such as time deposits, receivables, inventories and other assets.

Alternatively, the company may also seek corporate guarantee from its holding company or guarantees from any financial institutions.

The issuing company must not have overdue loans or defaults in the report obtained from the Credit Information Bureau (CIB).

However, all individuals, financial institutions and other corporate bodies and unincorporated Bhutanese private firms as well, are eligible to invest in commercial papers.

For the financial institutions, with prior approval from the Central Bank, they can also invest their excess funds parked with the Central Bank as reserves.

Commercial papers, according to the guideline, are to be issued in denominations of Nu 100,000 and multiples thereof.

An official from the company registry division said that in the near future a proper rule and regulation would be put in place.

Tshering Dorji

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