The Central Bank of Mauritius ("BOM") introduced in 2017 a licence for the issue of commercial papers ("CPs"). The aim of the BOM in doing so is two-fold: the licence should enable companies to diversify their source of funding. It is also intended to provide a steady supply of short term financial instruments for investors. Issuing CPs involves several steps, including obtaining a credit rating from external credit assessment institution, the appointment of an issuing and paying agent and of a custodian. Once the credit rating is obtained and the appointments completed, the prospective issuer will apply to the BOM for an issuer of commercial paper licence.
Guidelines have been issued by the BOM on the 11 January 2018 but are yet to come into force ("Guidelines").
In this article, we will outline the main features of this new regulated activity and will end with a short comparison with the recent evolution of the CPs legal regime in India.
Definition and key features of a Commercial Paper
Commercial papers are defined as unsecured, short-term money market instruments issued in the form of a promissory note with a maturity period not exceeding 364 days. The CPs can have a minimum size of issue of MUR 100 million. The CP can either be issued at a discounted price to its face value (as determined by the issuer based on relevant market factors), or at face value where the issuer receives the face value and accrued interest at maturity (as determined by the issuer based on relevant market factors). The CPs can be traded over the counter on the secondary market, be bought-back or transferred. There is no upper threshold to the size of the issue of the CPs, (except as determined by the board of directors of the issuer and as long as it is in line with the quantum indicated by an External Credit Assessment Institution ("ECAI")). While the limit for the period of maturity of a CP is of 364 days, it can in no case exceed the validity period of the issuer's credit rating as assessed by the recognised ECAI and as set out in the licence issued by the Bank of Mauritius.
The guideline provides for a list of information and disclosure which the CP offering document must contain, amongst which, (i) a short description of the issuer; (ii) a description of the CP, including form, tenor, mode of issue and credit rating; (iii) a copy of issuing and paying agent ("IPA") certificate; (iv) a summary of audited financial statements for the last three years; (v) the end-use of funds; (vi) the tax treatment of payments under the CP; (vii) disclosure to the investors that the investment is subject to credit and other risks and that payment will be made only if the issuer has made the funds available to the IPA; (viii) investors must be informed that that in case of default, they will be treated equally and rank as unsecured creditors in terms of priority of claims as laid down in the Insolvency Act 2009; and (ix) information to investors that the CP will be held in dematerialised form through a custodian.
The issue of CPs involves several participants, the Guidelines set out their respective roles and the conditions applicable to them.
Eligible Issuer - Only highly rated companies regulated by the Mauritius Companies Act 2001 are entitled to issue CPs, to the exclusion of financial institutions and cash dealers. The BOM will deliver an 'issuer of commercial paper licence' if the company (i) has not earlier than 12 months prior to the proposed issue of the CP, a total net asset value exceeding MUR 300 million (ii) exists for at least 5 years, with positive net profits after tax over the last 3 years; (iii) its credit exposure or the credit exposure of its holding company has not been classified as impaired by a financial institution; (iv) it does not have a history of recurrent default/late payments reported by the Mauritius Credit Information Bureau; (v) it has an established working capital limit sanctioned by a bank; and (vi) it has an 'Investment Grade' credit rating from a recognised ECAI.
The issuer of commercial papers licence is valid for one year, but is subject to the issuance limit specified and the CP rating not declining.
Eligible Investors - A CP can be held by foreign and local corporates or individuals whether they are residents or non-residents in Mauritius.
Issuing and paying agent - An IPA is a financial institution appointed to act on behalf of the Eligible Issuer to facilitate transactions in CPs. The IPA will be responsible for (i) making the offer of the CP to Eligible Investors (ii) to effect principal and interest payments at the maturity of the CPs; (iii) verifying and holding certified copies of original documents provided by the issuer in its custody; (iv) verifying all information disclosed in the offer document before issuance; (v) arranging for the allocation of an International Securities Identifying Number (ISIN) to each CP issue; (vi) conducting KYC on the investor funds in compliance with the relevant legislation; (vii) conducting customer suitability assessments to ensure that individual investors understand the risks linked to investment in CPs, and that such investment matches their objectives and risk appetite. The IPA will be responsible for the periodical reporting to the BOM. In case of default of the issuer, the IPA will promptly notify the investors, ECAI and the BOM within a maximum of three working days of occurrence of such default.
External Credit Assessment Institution - To be able to issue CPs, the Eligible Issuer must be rated by an entity approved by the BOM. An ECAI is an entity that issues external credit assessments and is recognised by the BOM. The list of recognised ECAIs is provided in the Bank of Mauritius Guidelines on the Recognition and Use of External Credit Assessment Institutes as revised in October 2017. In a CP transaction an ECAI will be responsible, amongst other things, for gathering all the relevant information affecting and likely to affect the financial health of the Eligible Issuer in future prior to, during, and after the CP issue. The IPA must inform the BOM of the ratings of the CP and any subsequent change in the rating on the day of the change itself.
Custodian - CPs being issued in dematerialised form; a custodian will be appointed by the Eligible Issuer to hold the CPs on an account for the Eligible Investors. The custodian must be a financial institution.
The main objective of the regulatory framework for the issuance of CPs is to provide the opportunity for larger companies to diversify their source of funding. In a market where there is an excess of liquidity - like it is currently the case for Mauritius - it is questionable whether CPs are a cheaper source of funding than borrowing from banks. The structuring and administration of CPs may prove overly stringent in many ways due to the costs involved in the structuring and administration of CPs.
The net worth criteria for issuing companies with a total value exceeding MUR 300 million and the minimum size of issue of CPs of MUR 100 million excludes small and medium size companies from accessing the short term unsecured money markets. The issuer of CPs have to be structured as companies incorporated under the Mauritius Companies Act 2001, excluding other forms of legal structures such as sociétés, trusts or limited partnerships.
In parallel, the framework is very protective of the investors' rights with disclosure requirements in the offer documents as well as periodic reporting allowing the BOM to keep an eye on money deposited with companies outside the regulatory ambit of the Banking Act 2004.
By way of comparison, the two last pitfalls highlighted above, have been amongst the main subjects of the reform of the existing regulatory framework of issue of commercial papers further to the Reserve Bank Commercial Paper Directions of August 2017 ("Directions") issued by the Reserve Bank of India ("RBI"). The Directions broadened the scope of eligible issuers of CPs to co-operative societies, unions, government entities, trusts and LLPs or any other body corporates having presence in India and having a net-worth of INR 100 crores or higher. The concept of special permission from the RBI for issuance of CPs by entities not otherwise covered under the Directions has also been introduced. These changes have been introduced to better address the economic realities and needs of the country.
The main focus of the Directions has been to enhance the disclosure norms in the offer document. By way of example, the exact end use of the money raised must be disclosed at the time of issue of the CPs. Additional disclosure on the outstanding CPs and other debt instruments of the issuer are now required. The offer document must further contain details of default of CPs or any other borrowings in the past three years. This major improvement in the Indian regulation of CPs will allow investors to take more informed decisions and increase the insights of the Reserve Bank of India into the affaires of the issuers.