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Commercial papers


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Commercial papers Meaning, Features, Types, Advantages, Disadvantages, Issuing and Redemption process.

Published in: Economy & Finance, Business
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Commercial papers

  2. 2. 3 COMMERCIAL PAPERS • MEANING • 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
  3. 3. 4 COMMERCIAL PAPERS • IN WHAT DENOMINATIONS A CP THAT CAN BE ISSUED? • CP can be issued in denominations of Rs.5 lakh or multiples thereof. • 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..
  4. 4. 5 COMMERCIAL PAPERS • FEATURES 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 company. 2. They are unsecured instruments as they are not backed by any assets of the company which is issuing the commercial paper.
  5. 5. 6 COMMERCIAL PAPERS • FEATURES 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.
  6. 6. 7 COMMERCIAL PAPERS • 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. • DRAFTS • 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.
  7. 7. 8 COMMERCIAL PAPERS • CHECKS • 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.
  8. 8. 9 COMMERCIAL PAPERS 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 company. 7) It has a wide range of maturity 8) It is exempt from federal SEC and State securities registration requirements.
  9. 9. 10 COMMERCIAL PAPERS • DISADVANTAGES OF COMMERCIAL PAPERS: 1) It is available only to a few selected blue chip and profitable companies. 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
  10. 10. 11 COMMERCIAL PAPERS 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 .
  11. 11. 12 COMMERCIAL PAPERS • 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 Client ID. 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 made. Issuer advises R&T agent to extinguish securities.