Companies looking to raise finance from diversified sources for either working capital may do so by issuing equity or debt securities. Debt securities are financial instruments representing a debt of the Issuer, it contains a promise by an Issuer to repay a defined amount to an investor (the holder of the instrument), on or by a specified date. These debt securities when issued can have different characteristics which include, interest bearing or discount debt instruments, tenor, listed or unlisted, secured or unsecured. Examples of debt securities include bonds, notes, commercial papers, bankers' acceptance, etc.
Commercial papers (CP) were introduced in Nigeria in 1962 to finance the export-marketing operations of the then Northern Marketing Board. Under that arrangement, the marketing boards met their cash requirements by drawing ninety-day (90 day) bills of exchange on the marketing boards. The bills were then discounted with the commercial banks participating in the scheme 1 .
Commercial papers are now the most common form of short term debt instruments issued by companies or organizations for the purpose of obtaining funds to meet short term obligations, the term 'short-term' in the context of debt securities means that it has a term of less than a year. Commercial papers usually have a maturity rate between a minimum of 15 days and a maximum of 270 days 2 . For many medium to large creditworthy issuers, it is a competitive alternative to bank loans and a way of raising working capital at short-term interest rates which offers competitive returns to investors in compensation for the issuer's credit risk. Commercial papers may be interest bearing or issued at a discount to face value, which is determined by the issuer.
Regulations governing the Issuance of Commercial Papers in Nigeria
By virtue of the Central Bank of Nigeria (CBN)'s circular to all Deposit Money Banks and Discount Houses on the Mandatory Registration and Listing of Commercial Papers dated 12 July 2016, deposit money banks and discount houses may only deal in CPs that are registered, quoted or intended for quotation on Authorised Securities Exchanges, whether acting in the capacity of an issuer, guarantor or Issuing, Placing, Paying and Collecting Agent (IPCA), Collecting and Paying Agent (CPA), etc. The issuance of registered CPs is presently regulated through the:
- CBN Guidelines on the Issuance and Treatment of Bankers Acceptances and Commercial Papers dated 18 November 2009 and reissued on 11 September 2019 (CBN Guidelines); and
- FMDQ Commercial Paper Registrations and Quotation Rules August 2019 (FMDQ Rules).
Accordingly, Issuers who wish to register and quote their commercial paper on the FMDQ must comply with the FMDQ Rules.
It is important to note that other major authorized securities exchanges in Nigeria namely, the Nigerian Stock Exchange and the National Association of Securities Dealers OTC Securities Exchange have over the years published proposed applicable regulations for commercial paper issuance which are NSE Listing Rules and NASD Proposed Rules for Admission of Commercial Papers on NASD OTC Securities Exchange respectively. As stated, these rules are proposed and are not currently in effect as the date of this Article.
Structure of Commercial Papers
Tenor and Minimum Issue Size
As earlier stated, CPs may be issued for tenors ranging between a minimum of fifteen (15) days and a maximum of two hundred and seventy (270) days, inclusive of any rollovers from the date of issue. The minimum issue value for commercial paper is N100million and in multiples of N50million thereafter. 3
Programme and Discreet Issue
As provided in the FMDQ Rules, CPs may be registered as a Discreet Issue (a single CP issuance which is not established under a Programme) or under a Programme through a shelf registration.
In the case of a CP programme, the Issuer has the discretion to issue several series/tranches of CPs with separate maturity dates or 're-open' existing CP issues (where there is no change in the maturity date). CP Programmes are valid for a period of three (3) years but may be extended in accordance with the provisions of the FMDQ Rules. 4
Although the FMDQ Rules provide that CP programmes are valid for a certain period, the commercial paper programme may be renewed no earlier than three (3) months to the expiration of the validity period by the issuer/promoter upon filing of necessary documentation prescribed by FMDQ from time to time. Upon the expiration of the validity period recommended by the FMDQ, the programme shall no longer qualify for a renewal and a fresh programme registration process is required to commence. 5
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2. Rule 3.2(i) FMDQ Rules
3. Rule 3.1(ix) FMDQ Rules
4. Rule 3.2 of the FMDQ Rules
5. Rule 3.2(vii) FMDQ Rules
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.