2. Commercial Papers
What is Commercial Paper (CP)?
Commercial Paper (CP) is an unsecured money market instrument issued in the form
of a promissory note.
When it was introduced?
It was introduced in India in 1990
Why it was introduced?
It was introduced in India in 1990 with a view to enabling highly rated corporate
borrowers to diversify their sources of short-term borrowings and to provide an
additional instrument to investors. Subsequently, primary dealers and all-India
financial institutions were also permitted to issue CP to enable them to meet their
short-term funding requirements for their operations.
3. Who can issue CP
Corporates, primary dealers (PDs) and the All-India Financial Institutions
(FIs) are eligible to issue CP.
Investors
Individuals, banks, other corporate bodies (registered or incorporated in India)
and unincorporated bodies, Non-Resident Indians and Foreign Institutional
Investors (FIIs) shall be eligible to invest in CP.
What is the minimum and maximum period of maturity prescribed for
CP
CP can be issued for maturities between a minimum of 7 days and a
maximum of up to one year from the date of issue.
4. Features of Commercial Paper
Commercial papers is a short-term money market instrument .
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.
Commercial paper can be issued directly by a company to investors or
through banks /merchant bankers.
5. Advantages of commercial paper
Simplicity
the advantages of commercial papers lies in its simplicity .it involes 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.
High Returns
The commercial paper provides investors with high returns than they could get from the
banking system.
Movement of funds
Commercial papers facilitates securitisation of loans resulting in creation of a secondary
market forn the paper and efficient movement of funds providing cash surplus to cash deficit
entities
6. RBI guidelines for issue of CPs :
A company can issue commercial paper only if it has :
• a tangiable net worth of not less than rs .10 crores as per the latest balance sheet;
• minimum current ratio of 1.33:1;
• a fund based working capital limit of Rs .25crores or more ;
• a debt servicing ratio closer to 2;
• the company is listed on stock exchange ;
• subject to CAS discipline ;
• it is classified under health code no.1 by the financing banks ;
• the issuing company would need to obtain p1from CRISIL..
Commercial papers shall be issued in multiple of rs .25lakhs but the minimum
amount to be invested by a single investor shall be rs.1 crore.
