Examining The Classification Of Commercial Papers Under The Companies Act, 2013 And Its Governance Consequences

A commercial paper is an unsecured, short-term debt instrument (promissory note) typically issued by large, high-credit-rated corporations, banks, and financial institutions, often to finance short-term needs like payroll and inventory, as a cost-effective alternative to a loan. These papers sit at the intersection of two regulatory regimes that ex facie adopt conflicting positions – securities law permits commercial papers to be listed and traded on stock exchanges, and company law, in contrast, classifies them as money market instruments rather than 'securities', thereby creating ambiguity on the applicable governance framework.¹ In this context, the question as to whether the listing of commercial papers renders an issuer a 'listed company' under Section 2(52) of the Companies Act, 2013 (Companies Act) arises regularly in transactional practice, particularly during group restructurings, short-term working capital financings, and governance compliance reviews. This remains one of the more persistent interpretative grey areas – our note examines the statutory scheme governing their regulatory classification, and offers a structured analysis demonstrating why the listing of commercial papers does not render an issuer a 'listed company' and trigger the attendant governance obligations.

Section 2(52) of the Companies Act defines a listed company as 'a company which has any of its securities listed on any recognised stock exchange' and excludes such classes of companies as may be prescribed in consultation with the Securities and Exchange Board of India (SEBI). While the ambit of the expression 'any of its securities' prima facie appears sufficiently broad to encompass all listed instruments, it hinges on the meaning of the term 'securities' as incorporated under the Companies Act, and specifically, on whether commercial papers fall within the contours of that definition. This threshold enquiry is central because several private companies list commercial papers even though their only listed instrument is a money market instrument rather than a capital-raising security.

The term 'securities' in Section 2(52) of the Companies Act has been imported from Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA), which defines 'securities' as 'securities amongst others, include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature...'. A plain reading of this definition suggests 3 conceptual elements for ascertaining whether any particular instrument can be classified as a 'security':

• Instruments representing ownership or share capital, such as shares, scrips and stocks: Commercial papers do not fall within the ambit of this element – under Section 2(c) of the Reserve Bank of India (RBI) Commercial Paper Directions, 2017, a commercial paper is defined as 'an unsecured money market instrument issued in the form of a promissory note' with a tenor between 7 days and 1 year. Commercial papers do not represent ownership, confer voting rights, or entitle holders to dividends. They therefore cannot be characterised as equity or preference share capital under Section 43 of the Companies Act.

• Instruments representing debt capital, such as bonds, debentures and debenture stock: Same as above, commercial papers do not fall within this element as well – Section 2(30) of the Companies Act adopts an expansive definition of 'debenture' but expressly excludes, through its proviso, instruments governed by Chapter III-D of the RBI Act, 1934. Section 45U(b) of the RBI Act designates commercial paper as a 'money market instrument'. Commercial papers are therefore statutorily excluded from the definition of 'debenture' for the purposes of Section 2(30) of the Companies Act.

• A residual category comprising 'other marketable securities of a like nature': The negotiability of commercial papers and the fact that they may be admitted to listing under the SEBI framework might suggest that they possess the attributes of marketability contemplated by this limb. However, whether this short-term credit instrument qualifies as a 'marketable security of a like nature' depends not on mere transferability but on its economic character and the context in which it is issued and acquired.

In the absence of express statutory guidance, the analysis turns to the limited judicial guidance on the point. The Gujarat High Court's decision in Essar Steel Ltd v. Gramercy Emerging Market Fund² contains the only judicial observation relevant to the character of commercial papers. Although the issue before the Court concerned whether floating rate notes constituted 'securities' under the SCRA, the Court articulated the 'finance and investment test' to distinguish investment instruments from commercial instruments, which involves an assessment of the following factors:

• The motivation behind the transaction and the purpose for which the instrument is issued: If it is intended to raise finance for the general use of the enterprise or fund substantial investments with the buyer's primary interest is in the profit that the instrument is expected to generate, then the instrument is likely to be a security, rather than if the note is exchanged to facilitate the purchase and sale of a minor asset or consumer goods, or to advance some other commercial or consumer purpose.

• Trading and ordinary perception: Whether the instrument is one in which there is common trading for speculation or investment, and the manner in which the investing public would ordinarily regard the instrument.

Applying the finance and investment test to the floating rate notes before it, the Court held that the attributes of the instrument pointed unequivocally to an investment context – the floating rate notes had been issued as part of a global restructuring plan undertaken by the company due to its financial difficulties, the investors were offered interest on their investments, and the notes were transferable – thereby creating 'a scope of common trading for speculation and investment'. On that basis, the Court concluded that the floating rate notes constituted marketable securities rather than instruments issued for short-term commercial purposes.

In applying this test, the Court referred to a commercial paper illustratively, identifying it as an example of an instrument issued in a commercial or consumer context rather than an investment context. Although made in obiter and not directed to the legal status of a commercial paper, it remains relevant where no other judicial authority exists and the statutory definition requires interpretation by reference to the nature and operation of the instrument. When the same test is applied to a commercial paper, the distinction is clear. Commercial papers are short-term, unsecured instruments issued solely to meet working-capital or liquidity needs; they are issued at a discount and redeemed at par; they do not offer investment returns beyond the discount; and they do not create opportunities for trading or speculation. Their purpose is transactional and commercial, not investment-oriented. As such, commercial papers fall outside the ambit of the expression 'marketable securities of a like nature'.

Once it is established that commercial papers do not constitute 'securities' for the purposes of Section 2(h) of the SCRA and Section 2(81) of the Companies Act, the statutory consequences follow directly. The listing of a commercial paper cannot trigger listed company status, as Section 2(52) of the Companies Act, which defines a listed company, applies only where a company has 'securities' listed on a recognised stock exchange. It also follows that the governance framework applicable to listed companies, including requirements relating to board composition, independent directors, and committee structures, is not applicable.

The analysis must also address the proviso to Section 2(52) of the Companies Act, which exempts certain classes of companies from being classified as listed companies even if they have listed certain classes of securities. Rule 2A of the Companies (Specification of Definitions Details) Rules, 2014 (Rules), identifies such specific classes of companies:

• Public companies that have listed non-convertible debt securities or non-convertible redeemable preference shares on a private-placement basis
• Private companies that have listed non-convertible debt securities on a private-placement basis
• Public companies whose equity shares are listed only on permitted foreign exchanges under Section 23(3) of the Companies Act

The Rules do not provide an independent meaning to 'securities'. Rather Rule 2(2) merely imports the definition from the SCRA. Therefore, Rule 2A does not expand the category of instruments stipulated under Section 2(52) of the Companies Act and has no application where the underlying instrument is not a 'security' in the first place, including commercial papers.

In conclusion, commercial papers may be listed under securities law, and yet they are not treated as 'securities' under company law. The source of this confusion stems from the structural duality of being listed in form but not in law – the listing of commercial papers does not render an issuer a 'listed company' under the Companies Act, nor does it attract the governance framework applicable to listed companies. Treating such an issuer as a listed entity can result in significantly heightened compliance requirements, including independent director appointments, constitution of board committees and governance adjustments, amongst others.

Footnotes

1. Money market instruments include commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity up to 1 year, call or notice money, certificates of deposit, usance bills, and any other like instruments.

2. (2003) 116 Comp Cas 248

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