Commercial paper is a short term unsecured promissory note issued by companies to raise debt. It is issued at a discounted price and has a fixed maturity date. While the issuer promises to pay a fixed amount at maturity, they pledge no assets. Commercial paper can be issued directly to investors or through banks and is a simpler and more flexible source of short term financing for companies compared to bank loans.

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. Types of CPs
 Direct paper
 Dealers paper

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.  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.
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5.  Commercial paper can be issued directly by a company
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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.  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.  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. 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.  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. 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.  Implication of CP: Borrowers can get atleast 20% of
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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.  Banks gain by increase interest rate done during busy
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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.  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.