• Commercial paper can be defined as a short term,
unsecured promissory notes which are issued at
discount to face value by well known companies that
are financially strong and enjoy a high credit rating.
• WHO CAN ISSUE CP?
• Corporates, primary dealers (PDs) and the All-India
Financial Institutions (FIs) are eligible to issue 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
• IN WHAT DENOMINATIONS A CP THAT CAN BE
• CP can be issued in denominations of Rs.5 lakh or
• HOW LONG CAN THE CP ISSUE REMAIN OPEN?
• The total amount of CP proposed to be issued should be
raised within a period of two weeks from the date on
which the issuer opens the issue for subscription.
• WHO CAN INVEST IN CP?
• Individuals, banking companies, other corporate bodies
(registered or incorporated in India) and unincorporated
bodies, Non-Resident Indians (NRIs) and Foreign
Institutional Investors (FIIs) etc. can invest in CPs..
1. They are negotiable by endorsement and delivery
and hence they are flexible as well as liquid
instruments. Commercial paper can be issued with
varying maturities as required by the issuing
2. They are unsecured instruments as they are not
backed by any assets of the company which is
issuing the commercial paper.
3. They can be sold either directly by the issuing company
to the investors or else issuer can sell it to the dealer who in
turn will sell it into the market.
4. It helps the highly rated company in the sense they can
get cheaper funds from commercial paper rather than
borrowing from the banks.
• However use of commercial paper is limited to only blue
chip companies and from the point of view of investors
though commercial paper provides higher returns for
him they are unsecured and hence investor should invest
in commercial paper according to his risk -return profile.
• TYPES OF COMMERCIAL PAPER
• The UCC identifies four basic kinds of commercial paper:
• PROMISSORY NOTES
• A promissory note is a two-party paper. The maker is the individual who
promises to pay while the payee or holder is the person to whom payment is
promised. The payee can be either a specifically named individual or merely
the bearer of the instrument who has it in his or her physical possession
when he or she seeks to be paid according to its terms. A note payable to
"bearer" can be paid to the person who presents it for remuneration. Such
an instrument is said to be bearer paper.
• A draft, also known as a bill of exchange, is a three-party paper
ordering the payment of money. The drawer is the individual issuing
the order to pay, while the drawee is the party to whom the order to
pay is given .As in the case of a promissory note, the payee is either a
specified individual or the bearer of the draft who is to receive
payment according to its terms. The draft is made payable on
demand or on a certain date.
• A check is a specific kind of draft, which is drawn on
a bank and payable on demand to a particular
individual or to the bearer, in which case it can be
written payable to "cash.“
• CERTIFICATES OF DEPOSIT.
• A certificate of deposit, frequently referred to as a
CD, is a written recognition by a bank of the
acquisition of a sum of money from a depositor for a
designated period of time at a specified interest rate,
coupled with a promise of repayment. The bank is
both the maker and the drawee, and the individual
making the deposit is the payee.
ADVANTAGES OF COMMERCIAL PAPERS:
1) It is quick and cost effective way of raising working capital.
2) Best way to the company to take the advantage of short term
interest fluctuations in the market
3) It provides the exit option to the investors to quit the investment.
4) They are cheaper than a bank loan.
5) As commercial papers are required to be rated, good rating
reduces the cost of capital for the company.
6) It is unsecured and thus does not create any liens on assets of the
7) It has a wide range of maturity
8) It is exempt from federal SEC and State securities registration
• DISADVANTAGES OF COMMERCIAL
1) It is available only to a few selected blue chip and
2) By issuing commercial paper, the credit available
from the banks may get reduced.
3) Issue of commercial paper is very closely
regulated by the RBI guidelines
ALLOTMENT OF CPS
Company checks its own eligibility to issue CPs.
Decides issue size
Appoints issuing and paying agent (IPA) .
Prepare documents pertaining to CP issues.
Issuer executes agreement with depository
Gets quotes from investors.
Finalizes allotment of CPs
IPA issues IPA certificates to investors.
Company gives investors details.
Investors account is credited with the CPs .
• PROCESS FOR REDEMPTION OF C.P.s
Beneficiary position at the time of redemption is
communicated to issuer.
Issuer insures that all investors are aware of DP ID and
Investor transfers Cps to redemption account of IPA
before 3 pm on the day.
IPA provides statement of transaction.
Investor provides statement of transaction.
IPA provides redemption cheque to investor.
Issuer certifies to NSDL/CDSL that payment has been
Issuer advises R&T agent to extinguish securities.