MUMBAI, Jan 2 (Reuters) - The Reserve Bank of India will allow issuers to buy back commercial papers (CPs) before maturity, a move which will provide greater flexibility for companies in managing their liquidity.
The CPs must be bought back in the secondary market at prevailing market prices and cannot be bought back for at least seven days after the issuance date, the RBI said in a consolidated guideline on CPs late on Tuesday.
"There are a few small issuers who sometimes buy back CPs if they have surplus cash to save interest cost," said a senior bank treasury official.
"But there was no clear rule. This guideline now gives clarity," the official said.
The circular also allowed banks and financial institutions to provide "stand-by" facilities to enhance the credit rating of the CP. This measure is allowed for loans, but not for corporate bonds.
The total amount of CPs outstanding is around 2 trillion rupees as of Nov. 30, with issuance rising nearly 60 percent during in the fortnight ending Nov. 30, according to the RBI's latest data. (Reporting by Suvashree Dey Choudhury)