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
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.
5. Commercial paper can be issued directly by a company
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
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
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.