KARACHI (May 12 2003) : The State Bank of Pakistan (SBP) has prepared draft proposals for commercial papers with which, if approved and adopted, the debt market would see speedy floatation of short-term bonds.
Already, Packages has issued a commercial paper, while several companies have completed the spadework and soon they would hit the debt market.
The guidelines are:
Banks/development financial institutions (DFIs) shall not deal in any manner and in any capacity in commercial papers (CPs) of denomination below Rs 1 million.
All the endorsements made by the banks/DFIs to subsequent purchasers of their holding of CPs shall be strictly on 'without recourse basis'.
While underwriting the issue, banks shall ensure that their total exposure, including underwriting, does not exceed their per party exposure limit prescribed under Prudential Regulation-I.
In order to facilitate the banks in this respect, underwriting commitment shall be assigned a weight-age of 50 percent for the purpose of calculating per party exposure limit.
The banks/DFIs should, however, take due care to ensure that their per party limit is not breached, even if they have to take up their committed share of issue.
Banks & DFIs are eligible to perform the role of 'Issuing Paying Agent' (IPA) provided that:
(i). They meet the minimum capital requirement of SBP and have a minimum credit rating of 'A-' (medium to long term) and 'A2' (short term) from the credit rating agencies approved by SBP.
(ii). They ensure that all the regulatory requirements as prescribed by SECP and SBP are duly met by the issuer before the issue can be taken up by the prospective investors/dealers.
(iii). They have in place written internal guidelines (operational procedures) duly approved by their Board of Directors for dealing with commercial papers in the capacity of IPA.
(iv). They open a separate escrow account for receiving and disbursing funds on account of CP.
(v). They make it clear to the investors, in the offering document, that their investment is subject to credit and other risks inherent in such instruments, and payment will be made to them only if the issuer has made the funds available to IPA.
(vi). They inform the prospective investors that, in case of default, the IPA will not be in a position to seek recovery from the issuer or initiate any action against the issuer, either on its own or on behalf of the investors.
(vii). In case of default by the issuer, it will be the responsibility of the bank/DFI acting as IPA to notify promptly such default to the investors. For the purpose of these guidelines, payment of only partial amount shall also be considered default.
(viii). In case of partial payment by the issuer, bank/DFI acting as IPA shall distribute the received funds on pro rata basis. However, while doing so, they shall take all necessary measures to safeguard their position against any adverse consequences including incorporation of this provision in the agreement executed between the issuer and the IPA.
CUSTODIAN: At the discretion of the issuer and IPA, investors may be required to invariably inform the custodian about the sale/purchase to make the transfer effective.
If a bank / DFI desires to perform the role of custodian, it should comply with the following guidelines:
a) The bank / DFI desirous of performing the role of custodian would develop operational procedures (Manual) for this purpose.
b) The bank / DFI shall take necessary steps and all reasonable measures to protect them from the risk of frauds and forgeries and consequent obligations arising thereto.
a). The banks/DFIs shall invest in only those CPs:
(i). Which have been issued in pursuance of SECP's guidelines for the issue of Commercial Paper.
(ii). Where the equity of the issuer is not less than Rs 100 million.
(iii). Where the current and debt-equity ratios of the issuer do not fall below 1:1 and 60:40.
(iv). Where the issuer does not have any overdue or default as evidenced by a report received from Credit Information Bureau of State Bank of Pakistan. The CIB report obtained by the bank/DFI for this purpose should not be more than two months old.
(v). Where the current credit rating of the issuer, rated by a credit rating agency approved by State Bank of Pakistan, should not be below 'A-' (long term) and 'A2' (short term).
(vi). Where the IPA is either a scheduled commercial bank, DFI or an investment bank with a minimum credit rating of 'A-' (long term) and 'A2' (short term) from a credit rating agency approved by State Bank of Pakistan.
b). The banks/DFIs investing in CP shall ensure that their total exposure including investment in commercial papers at all time remains within the per party exposure limit prescribed under Prudential Regulation-I.
c). The banks/DFIs wishing to invest in CP's shall obtain one-time prior approval from State Bank for commencing/undertaking this activity.
PROVIDER OF CREDIT ENHANCEMENT: As the CP shall be an unsecured instrument, banks will not provide any guarantee, undertaking etc which may give an impression to the prospective investors that the bank stands behind such issue.
STANDARD DOCUMENTATION: In order to bring uniformity and standardisation, PBA shall prepare standardised documents (such as the model format of Commercial Paper, IPA agreement, Dealership agreement, Mandate Letter, Transfer Memo, etc) in the light of guidelines issued by SBP and SECP for use of banks/DFIs.
However, banks/DFIs may continue to use documents as suggested by their legal counsel till such time as these documents are made available.