In September 2018, Infrastructure Leasing & Financial Services — IL&FS — failed to repay a Rs 1,000 crore commercial paper obligation. The company had been rolling over short-term paper for years, using new CP issuances to repay maturing ones, funding long-term infrastructure projects with 90-day money. When the market stopped buying its paper, the entire structure collapsed. Mutual funds holding IL&FS commercial paper watched their net asset values crater overnight. The contagion spread across the NBFC sector as investors suddenly questioned whether other large CP issuers were running the same maturity mismatch. The IL&FS failure did not just destroy one company — it revealed that India's commercial paper market, which had grown to over Rs 6 lakh crore in outstanding issuances, was carrying risks that many participants had chosen to ignore. The regulatory response took five years. The Master Direction on Commercial Paper and Non-Convertible Debentures of original or initial maturity up to one year (RBI_MD_12592), issued on January 3, 2024, is the RBI's answer to what went wrong.
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What is commercial paper, and why do companies use it?
Commercial paper is an unsecured promissory note issued by a company to raise short-term funds. A company that needs Rs 100 crore for working capital can issue CP at a discount to face value — say, at Rs 98.5 crore for a 90-day maturity — and the investor earns the Rs 1.5 crore difference as return. No collateral is pledged. The investor relies entirely on the issuer's creditworthiness.
The 2024 Master Direction defines the instrument plainly:
"'Commercial Paper (CP)' means an unsecured money market instrument issued in the form of a promissory note."
Why do companies use CP instead of bank loans? Cost. A highly rated corporate — an AAA or AA-rated company — can issue 90-day CP at rates significantly below the bank's lending rate. The company bypasses the bank's intermediation margin. The investor — typically a mutual fund or an insurance company — earns a higher yield than a bank deposit. Both parties benefit from disintermediation. The bank, sitting in the middle, loses a lending opportunity but gains fee income if it acts as the Issuing and Paying Agent.
The CP/NCD Directions 2024 (RBI_MD_12592) impose strict tenor limits: a CP's maturity cannot be less than seven days or more than one year. The minimum denomination is Rs 5 lakh and multiples of Rs 5 lakh thereafter. This is a wholesale market — retail investors are present but capped at 25 percent of any primary issuance.
What went wrong with IL&FS, and why did it freeze the CP market?
IL&FS was not a small company. It was a sprawling infrastructure conglomerate with over 300 subsidiaries, rated AAA by multiple rating agencies, and its commercial paper was held by dozens of mutual fund schemes. When it defaulted on a Rs 1,000 crore CP obligation in September 2018, the immediate damage was to the mutual funds holding that paper — their NAVs dropped because the CP they held was suddenly worth far less than face value.
But the systemic damage was far worse. IL&FS had been funding 20-year infrastructure projects by rolling over 90-day commercial paper. This asset-liability mismatch — borrowing short to lend long — worked only as long as the market continued to buy new issuances. The moment investor confidence cracked, the rollover mechanism failed, and the company could not repay maturing paper because the underlying assets were illiquid infrastructure loans with decades of remaining tenor.
The contagion spread because other NBFCs operated on the same model. DHFL, Reliance Capital, and others had large CP programmes that relied on continuous market access. After IL&FS, mutual funds became reluctant to buy NBFC paper, NBFC borrowing costs spiked, and several firms entered resolution proceedings. The entire NBFC liquidity crisis of 2018-2019 — which required extraordinary RBI intervention through targeted long-term repo operations — began with a single CP default.
Why did the regulatory framework fail to prevent this? Because the pre-2024 CP directions — the Reserve Bank Commercial Paper Directions, 2017 RBI/2017-18/43 — did not adequately address the concentration of CP in the hands of mutual funds, the maturity mismatch risk of issuers funding long-term assets with short-term paper, or the opacity of the primary issuance process. The RBI's own status paper on the commercial paper market (Status Paper on Commercial Paper (CP) Market in In) had identified structural issues years earlier, but the growth of the market had outpaced the regulatory response.
What is a Certificate of Deposit, and why do banks issue them?
A Certificate of Deposit is the bank's counterpart to commercial paper. Where CP is issued by corporates to raise working capital, a CD is issued by a bank to raise deposits in bulk. The Certificate of Deposit Directions 2021 (RBI_MD_12108) defines the instrument:
"'Certificate of Deposit' or 'CD' is a negotiable, unsecured money market instrument issued by a bank as a Usance Promissory Note against funds deposited at the bank for a maturity period upto one year."
Why would a bank issue a CD when it can simply accept deposits? Liability management. A bank that needs exactly Rs 500 crore of 6-month funding to match a specific asset can issue a CD for precisely that amount and tenor. Retail deposits are unpredictable — they come in varying amounts, at varying maturities, and can be withdrawn prematurely. CDs give the treasury team precise control over the liability side of the balance sheet.
The eligible issuers are limited to Scheduled Commercial Banks, Regional Rural Banks, and Small Finance Banks. Eligible investors include all persons resident in India. The tenor must be between seven days and one year, and issuance must be in dematerialised form.
One critical restriction: banks are not allowed to grant loans against CDs, unless specifically permitted by the Reserve Bank. Why? Because allowing loans against CDs would create a circular funding structure — a bank issues a CD to raise funds, then the CD holder borrows against it, effectively returning the funds to the banking system with no net addition to resources. The prohibition prevents this circularity.
CDs also carry a buyback provision. Issuing banks can buy back CDs before maturity, but only at the prevailing market price, only after 7 days from issuance, and the buyback offer must be extended to all investors in a particular issue on identical terms. This prevents selective buybacks that could disadvantage smaller investors.
What changed with the 2024 CP/NCD Master Direction?
The 2024 Directions (RBI_MD_12592) replaced and consolidated three earlier regulatory instruments: the 2010 notification on NCD issuance (FMRD notification), the relevant section of the 2016 master direction on money market instruments (Master Direction on Money Market Instruments: Call), and the 2017 Commercial Paper Directions RBI/2017-18/43. The consolidation was part of the comprehensive review of money market directions announced in the June 2019 Statement on Developmental and Regulatory Policies (Statement on Developmental and Regulatory Policies).
The key changes address the failures exposed by IL&FS.
Electronic issuance and settlement. CPs and NCDs must be issued in dematerialised form and held with a SEBI-registered depository. All secondary market transactions must be reported on the F-TRAC platform within 15 minutes of execution. The paper-based issuance processes that made it difficult to track who held what during the IL&FS crisis are eliminated.
Expanded issuer eligibility with safeguards. The 2024 directions allow companies, NBFCs including HFCs, InvITs, REITs, All India Financial Institutions, and any body corporate with a minimum net worth of Rs 100 crore to issue CPs. But there is a critical safeguard: all fund-based facilities availed by the issuer from banks, AIFIs, or NBFCs must be classified as Standard at the time of issue. A company whose bank loans are classified as stressed cannot issue CP.
NCD tenor floor. While CPs can have tenors as short as 7 days, NCDs — which are secured instruments — must have a minimum tenor of 90 days. The shorter tenors are reserved for the unsecured instrument because secured short-term borrowing is better served through the repo market.
No call/put options. The directions prohibit CPs and NCDs with embedded options. Why? Because call and put options create uncertainty about the actual maturity of the instrument. An issuer with a callable CP could redeem it early, forcing the investor to reinvest at potentially lower rates. A puttable CP gives the investor the right to demand early redemption, creating liquidity risk for the issuer. By prohibiting options, the RBI ensures that the stated maturity is the actual maturity.
No underwriting or co-acceptance. CPs and NCDs cannot be underwritten or co-accepted. This means the issuer must find buyers on its own merit — it cannot rely on a bank guarantee to prop up demand. The policy forces market discipline: if investors will not buy your paper without a guarantee, you should not be issuing it.
How do NCDs fit into the regulatory landscape?
Non-Convertible Debentures of original maturity up to one year occupy an unusual regulatory space. They are debt securities — governed by company law and SEBI regulations when listed — but because their maturity is under one year, the RBI treats them as money market instruments. The 2024 directions bring NCDs under the same framework as CP, creating a unified regime for all short-term corporate debt.
The distinction between CP and NCD matters for investors. CP is unsecured — the investor has no claim on specific assets if the issuer defaults. An NCD is secured — backed by specific assets or a charge on the issuer's property. This security explains why the NCD tenor floor is 90 days rather than 7 days: for very short tenors, the cost of creating and perfecting security interest outweighs the benefit.
For SEBI-listed NCDs, there is an additional layer of regulation. The debenture trustee — a SEBI-registered entity — must monitor the issuer's compliance with the terms of the NCD. This dual regulation (RBI for money market aspects, SEBI for listing and debenture trustee requirements) creates complexity but also adds a layer of investor protection that standalone CP does not offer.
The RBI's 2004 status paper on the CP market (RBI releases Status Paper on Commercial Paper Mark) had already identified the need to develop the short-term corporate debt market beyond CP alone. Twenty years later, the 2024 directions achieve that vision by creating a single regulatory framework for both CP and NCDs.
The CD as a bank liability management tool
The Certificate of Deposit market in India serves a function that is invisible to most observers but critical to bank operations. When a large bank needs to raise Rs 2,000 crore of 3-month funding to match a specific asset — say, a batch of corporate loans maturing in 90 days — it cannot rely on retail deposits walking in the door. Retail deposits are unpredictable in timing, amount, and tenor. CDs solve this by allowing the bank to raise a specific amount, at a specific tenor, at a rate determined by the market.
The secondary market for CDs is active but not deep. CDs trade either in OTC markets, including on Electronic Trading Platforms, or on recognised stock exchanges. The settlement cycle for OTC trades is T+0 or T+1 — fast enough to serve as a near-cash instrument for institutional investors.
"All secondary market transactions in CDs shall be settled on a DvP basis through the clearing corporation of any recognized stock exchange or any other mechanism approved by the Reserve Bank."
Why does the RBI insist on Delivery versus Payment settlement? Because DvP eliminates settlement risk. In a DvP system, the transfer of money and the transfer of the CD happen simultaneously. Neither party is exposed to the risk of paying for a CD it never receives, or delivering a CD for which it never gets paid.
Reserve requirements — both CRR and SLR — apply to CDs. The funds raised through CD issuance are liabilities of the bank, and the bank must maintain CRR and SLR against them just as it would against regular deposits. This prevents banks from using CDs to circumvent reserve requirements.
From RBI_1773 to RBI_MD_12592: the regulatory chain
The short-term corporate debt regulatory chain begins with the RBI's earliest status paper on commercial paper in India (Status Paper on Commercial Paper (CP) Market in In), which documented the nascent CP market. The 2003 guidelines on CP issuance (Guidelines for issue of Commercial Paper(CP)) (since withdrawn) established the basic framework. The 2016 consolidated money market direction (Master Direction on Money Market Instruments: Call) brought CP, CD, and NCD into a single regulatory instrument. The 2017 standalone CP Directions RBI/2017-18/43 separated CP into its own direction with updated rules. The 2021 CD Directions (RBI_MD_12108) modernised the CD framework with mandatory demat issuance and enhanced reporting. And the 2024 CP/NCD Directions (RBI_MD_12592) consolidated CP and NCD into a single comprehensive framework.
Each link in the chain was a response to a market failure or a structural gap. The IL&FS crisis accelerated the process, but the direction was set years earlier when the RBI recognised that a Rs 6 lakh crore market operating on fragmented regulatory directions was a systemic risk. The 2024 Master Direction is not the final step — the RBI's 2024 working paper on CP rate spread drivers (RBI Working Paper No. 02/2024: Drivers of Commerci) indicates that research into CP market dynamics continues — but it is the most comprehensive overhaul to date, and it was built on the lessons of the worst corporate debt market failure in Indian history.