Be260 C Psnew

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Be260 C Psnew

  1. 1. COMMERCIAL PAPERS <ul><li>HIGHLY POPULAR IN USA </li></ul><ul><li>INTRODUCED IN 1990 ON RECOMMENDATION OF VAGHUL COMMITTEE </li></ul><ul><li>SHORT TERM UNSECURED USANCE PROMISSORY NOTES ISSUED BY FIRMS TO RAISE FUNDS </li></ul><ul><ul><li>GENERALLY HIGH CREDIT WORTHY LARGE FIRMS WITH CONSIDERABLE FINANCIAL STRENGTH ARE ABLE TO ISSUE CPs </li></ul></ul>
  2. 2. <ul><li>WHY POPULAR </li></ul><ul><li>HIGH LIQUIDITY IN MONEY MARKET </li></ul><ul><li>LOW COST AS COMPARED TO OTHER MONEY MARKET INSTRUMENTS </li></ul><ul><li>LARGE SURPLUS FUNDS AVAIALABLE FROM THE BANKING SECTOR </li></ul><ul><li>LIMITED AVAILABILITY OF OTHER ASSETS </li></ul>
  3. 3. <ul><li>FEATURES </li></ul><ul><ul><li>MARKETABLE SECURITIES, HENCE LIQUIDITY </li></ul></ul><ul><ul><li>MATURITY PERIOD 15 TO 365 DAYS </li></ul></ul><ul><ul><li>MIN ISSUE AMOUNT 5 LAKHS & IN MULTIPLES THEREOF </li></ul></ul><ul><ul><li>ISSUED AT DISCOUNT TO FACE VALUE & IS REDEEMED AT FACE VALUE </li></ul></ul><ul><ul><li>EITHER DIRECTLY PLACED OR SOLD THROUGH DEALERS </li></ul></ul><ul><ul><li>TRANSFERRED BY ENDORSEMENT & DELIVERY </li></ul></ul><ul><ul><li>FIXED MATURITY </li></ul></ul>
  4. 4. <ul><li>BUYERS </li></ul><ul><ul><li>USUALLY BOUGHT BY INVESTORS HAVING SURPLUS FUNDS </li></ul></ul><ul><ul><ul><li>WHO INTEND HOLDING IT TILL ITS MATURITY </li></ul></ul></ul><ul><ul><ul><li>WANT TO INVEST SURPLUS FUND FOR A SHORT PERIOD WITH MINIMUM OF RISK </li></ul></ul></ul><ul><ul><li>BANKS </li></ul></ul><ul><ul><li>INSURANCE COMPANIES </li></ul></ul><ul><ul><li>UNIT TRUSTS & FIRMS </li></ul></ul>
  5. 5. <ul><li>ELIGIBILITY (TO ENSURE ONLY STRONG COs) </li></ul><ul><ul><li>COMPANIES, ALL INDIA FIs, PDs & SDs </li></ul></ul><ul><ul><ul><li>MIN TANGIBLE NETWORTH* OF RS 40 MILLN. </li></ul></ul></ul><ul><ul><ul><li>SANCTIONED FUND BASED LT FOR BANK FINANCE AT LEAST 40 MILLION </li></ul></ul></ul><ul><ul><ul><li>MINIMUM RATING (P 2 FROM CRISIL, A-2 FROM ICRA) </li></ul></ul></ul><ul><ul><ul><li>BORROWER’S A/C SHOULD BE CLASSIFIED AS STANDARD ASSETS BY BANKS/FIs </li></ul></ul></ul><ul><li>*(PAID UP CAP+GENERAL RES+SH PREM A/C+CAP DEB RED RES+OTHER FREE RES LIKE DIVID EQ RES+DELOPMT REBATE RES+DEVLEOPMT ALLOWNACE RES+INVEST ALLOWNACE RES+CAPITAL RES CREATED THROUGH PROFIT OR THROUGH ASSET SALE ) - (ACCUMULATED LOSS+DEFERRED REV EXP+OTHER INTANGIBLE ASSETS) </li></ul>
  6. 6. <ul><li>BENEFITS TO COMPANY </li></ul><ul><li>ALTERNATIVE SOURCE OF SHORT TERM FINANCE. PROVES HANDY DURING PERIODS OF TIGHT BANK CREDIT </li></ul><ul><li>SOLD ON UNSECURED BASIS </li></ul><ul><li>MATURING CP CAN BE REPAID BY SELLING NEW CP & THUS CAN PROVIDE A CONTINUOUS SOURCE OF FUNDS </li></ul><ul><li>CAN BE TAILORED TO SUIT THE FIRM’S REQUIREMENTS </li></ul><ul><li>CAN BE ISSUED EVEN WHEN MONEY MKTY IS TIGHT </li></ul><ul><li>CHEAPER THAN COST OF COMMERCIAL BANK LOAN. (INTEREST YIELD LESS THAN PRIME RATE OF INTEREST) </li></ul>
  7. 7. <ul><li>LIMITATIONS TO COMPANY </li></ul><ul><li>CAN’T BE REDEEMED UNTIL MATURITY. (IN CASE OF CASH CRUNCH FIRM WILL HAVE TO INCUR INTEREST COSTS) </li></ul><ul><li>ALWAYS AVAIALABLE TO TO FINANCIALLY SOUND & HIGH RATED COMPANIES (FIRMS WITH LIQUIDITY PROBLEMS MAY NOT BE ABLE TO RAISE FUNDS) </li></ul><ul><li>AMOUNT OF LOANABLE FUNDS AVAILABLE IN CP MKT LIMITED TO AMT OF EXCESS LIQUIDITY OF VARIOUS PURCHASERS OF CP. </li></ul>
  8. 8. <ul><li>EFFECTIVE COST/INTEREST yield </li></ul><ul><ul><li>INT RATE DETERMINED BY MARKET </li></ul></ul><ul><ul><li>IN USA , NORMALLY LESS THAN BANK BORROWING RATE. IT IS THE FUNCTION OF </li></ul></ul><ul><ul><ul><li>PRIME LENDING RATE </li></ul></ul></ul><ul><ul><ul><li>MATURITY </li></ul></ul></ul><ul><ul><ul><li>CREDIT WORTHINESS OF THE ISSUER </li></ul></ul></ul><ul><ul><ul><li>RATING PROVIDED BY RATING AGENY (S& P. MOODY) </li></ul></ul></ul><ul><ul><li>IN INDIA CRISIL & ICRA RATE CPs ON BASIS OF </li></ul></ul><ul><ul><ul><li>DEBT OBLIGATIONS </li></ul></ul></ul><ul><ul><ul><li>CASH ACCRUALS </li></ul></ul></ul><ul><ul><ul><li>UNUSED CASH CREDIT LIMITS </li></ul></ul></ul><ul><ul><ul><li>TRADEABLE SECURITIES LIKE UNITS </li></ul></ul></ul>
  9. 9. <ul><li>EFFECTIVE COST/INTEREST YIELD </li></ul><ul><ul><li>SINCE SOLD AT DISCOUNT & REDEEMED AT ITS FACE VALUE </li></ul></ul><ul><ul><li>THUS EFFECTIVE PRE TAX COST OF CP IS </li></ul></ul><ul><ul><li>COST VARIES INVERSALLY TO ISSUE PRICE & MATURITY PERIOD </li></ul></ul>
  10. 10. <ul><li>EFFECTIVE COST/INTEREST YIELD </li></ul><ul><li>A FIRM SELLS 120 DAYS CP (RS 100 FACE VALUE) FOR RS 96. INT YIELD WILL BE 12.5% </li></ul><ul><li>INT ON CP IS TAX DEDUCTIBLE, THEREFORE AFTER TAX INT WILL BE LESS </li></ul><ul><li>ASSUMING THAT FIRM’S MARGINAL TAX RATE IS 35%, AFTER TAX INT YIELD IS 8.13% </li></ul><ul><li>0.125 ( 1- 0.35) = 0.0813 Or 8.13% </li></ul>
  11. 11. <ul><li>EFFECTIVE COST/INTEREST YIELD </li></ul><ul><li>IN INDIA THE COST OF CP INCLUDES </li></ul><ul><ul><li>DISCOUNT </li></ul></ul><ul><ul><li>RATING CHARGES 0.10% </li></ul></ul><ul><ul><li>STAMP DUTY 0.2% - If placed through banks 1.0% - If placed through merchnt bankers </li></ul></ul><ul><ul><li>ISSUING & PAYING AGENT CHARGES 0.1% </li></ul></ul><ul><li>A FIRM ISSUES 90 DAYS CP (RS 1000 FACE VALUE) FOR RS 985. CREDIT RATING EXP ARE 0.5% OF THE SIZE OF ISSUE, IPA CHARGES BEING 0.35% AND STAMP DUTY 0.5%. WHAT IS THE COST OF CP </li></ul><ul><li>DISCOUNT IS RS 15; RATING & IPA CHARGES AMOUNTS TO 1.35 % X Rs 1000 = Rs 13.5. THUS THE COST OF CP IS </li></ul>
  12. 12. <ul><li>INDIAN SCENARIO </li></ul><ul><li>INSPITE OF LOW COST COMPANIES ARE NOT RAISING FUNDS THROUGH CPs TO THE EXTENT THEY ARE PERMITTED </li></ul><ul><li>BANKS NOT WILLING TO BUY AS THEY COULD LOSE 5-6 % PROFITS AS INTEREST. MORE INTERESTED IN LENDING TO COMPANIES THROUGH CASH CREDIT SYSTEM </li></ul><ul><li>FOR GETTING HIGHER RATING ISSUE SIZE SHOULD BE LARE WHICH LEADS TO HIGHER DEBT OBLIGATIONS </li></ul><ul><li>IN CASE OF GETTING LOWER RATING COMPANIES MAY HAVE TO OFFER HIGH INT RATE TO MOP UP MONEY </li></ul>
  13. 13. <ul><li>ISSUE </li></ul><ul><ul><li>CAN NOW BE ISSUED AS A </li></ul></ul><ul><ul><ul><li>STAND ALONE FACILITY (NOW DELINKED FROM WORKINGCAPITAL LIMITS, EARLIER MPBF OF MIN 25 CR.) </li></ul></ul></ul><ul><ul><ul><li>AGAINST WORKING CAPITAL ENTITLEMENTS </li></ul></ul></ul><ul><ul><ul><li>A STAND ALONE FACILITY WITH STANDBY ASSISTANCE/ CREDIT BACKSTOP FACILITY FROM BANK/FIs </li></ul></ul></ul><ul><ul><li>PROPOSAL PASSED BY BOARD </li></ul></ul><ul><ul><li>SELECTING ISSUING & PAYING AGENTS (BANK ONLY) </li></ul></ul><ul><ul><li>EVERY ISSUE NEEDS TO BE REPORTED TO RBI </li></ul></ul>

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