Commercial papers

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Commercial papers

  1. 1. A short term unsecured negotiable instrument consisting of promissory notes With a fixed maturity Generally issued by companies as a means of raising short term debt. Issued at a discounted face value The issuer promises a fixed amount at a future date but pledges no assets
  2. 2. Types of CPs  Direct paper  Dealers paper
  3. 3. Participants  Issuers:  All private sector company, public sector units, non- banking companies etc.  Investors:  Individuals, banks, corporate and also NRI s.  Usually banks, large corporate bodies and public sector units with investible funds participate in CP market.
  4. 4.  Features of commercial paper:  Commercial paper is a short term money market instrument comprising usance promissory note with a fixed maturity.  It is a certificate evidencing an unsecured corporate debt of short term maturity.  Commercial paper is issued at a discount to face value basis but it can also be issued in interest-bearing form.  The issuer promises to pay the buyer some fixed amount on some future period but pledges no assets only his liquidity and established earning power, to guarantee that promise. 
  5. 5.  Commercial paper can be issued directly by a company       to investor or through banks/merchant bankers. Advantages of commercial paper: Simplicity: The advantage of commercial paper lies in its simplicity. It involves hardly any documentation between the issuer and investor. Flexibility: The issuer can issue commercial paper with the maturities tailored to match the cash flow of the company.
  6. 6.  Diversification:  A well rated company can diversify its source of finance from banks to short-term money markets at somewhat cheaper cost.  Easy to rise long-term capital:  The companies which are able to raise funds through commercial paper become better known in the financial world and are thereby placed in a more favorable position for raising such long-term capital as they may, from time to time, require.  Thus there is an inbuilt incentive for companies to remain financially strong.
  7. 7.  High returns:  the commercial paper provides investors with higher returns than they could get from the banking system.  Movement of funds:  Commercial paper facilities securitization of loans resulting in creation of a secondary market for the paper and efficient movement of funds providing cash surplus to cash deficit entities.
  8. 8. Commercial paper in India  In India, on the recommendations of vaghul working group, the RBI announced on 27th march,1989 that commercial paper will be introduced soon in Indian money market.  1.there is a need to have limited introduction of commercial paper.  2. initially, access to the commercial paper market should be restricted to rated companies having a net worth of 5crore and above with good dividend payment record.
  9. 9.  The commercial paper market should function within the overall discipline of CAS.  The RBI would have to administer the entry on the marker, the amount of each issue and the total quantum that can be raised in a year.  No restriction be placed on the participants in the commercial paper market except by way of minimum size of the note.  Commercial paper should be excluded from the stipulation on unsecured advances in the case of banks.
  10. 10. Procedure & time frame for issue of commercial paper  Application to RBI through bank.  RBI to communicate in writing their decision on the amount of commercial paper to be issued to the leader bank.  Issue to be completed within 2 weeks from the date of approval of RBI through Pvt placement.  Issue may be spread over 2 weeks on due date but all such commercial paper shall bear the some maturity date.  Issuing company to advise RBI through a bank amount of actual issue of CP within 3days of completion of the issue.
  11. 11.  Implication of CP: Borrowers can get atleast 20% of     working capital from market increase advance from bank interest. 1st class borrowers prestige of jointy CP club with approval of CRSIL,banking system & Return on investment. sc Issue of CP outside scheme of bank finance. Main aim of RBI to ensure CP develops a sound money market instrument. Implications on bank: Banks themselves can invest inCP & show this as short term investment.
  12. 12.  Banks gain by increase interest rate done during busy       season & by service charges & paying commission. Impact on economy: Large company & banks operate in competitive atmosphere with more efficiency result in excellence in services of banks & management of finance by company. Recent trends: liberalised CP terms may 30, 1991. Not require approval of RBI. Minimum working capital limit reg by a company to 5 Crores Increase 75% of working capital.
  13. 13.  Features of Commercial paper in INDIA:  Same company are using this market for funds.  Banks hold till maturity no secondary market is allowed.  Removal of stringent conditions & regulatory measures to issuers , investors, & dealers will improve CP as a source of corporate financing.

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