- Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of large institutional buyers. Banks, corporations and foreign governments commonly use this type of funding.
- An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.
- An unsecured and unregistered short-term obligation issued by an institutional borrower to investors who have temporarily idle cash.
- Short-term, unsecured, discounted, and negotiable notes sold by one company to another in order to satisfy immediate cash needs.
COMMERCIAL PAPER IN INDIA:
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.
ISSUER OF COMMERCIAL PAPER:
Corporate, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP.
ELIGIBILITY CRITERIA FOR ISSUING COMMERCIAL PAPER:
A corporate would be eligible to issue CP provided –
- the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore
- company has been sanctioned working capital limit by banks or all-India financial institutions
- the borrowal account of the company is classified as a Standard Asset by the financing banks/ institutions.
To summaries the above discussion on commercial paper
- CPs are issued by companies in the form of usance promissory note, redeemable at par to the holder on maturity.
- The tangible net worth of the issuing company should be not less than Rs.4 crores.
- Working capital (fund based) limit of the company should not be less than Rs.4 crores.
- Credit rating should be at least equivalent of P2/A2/PP2/Ind.D.2 or higher from any approved rating agencies and should be more than 2 months old on the date of issue of CP.
- Corporates are allowed to issue CP up to 100% of their fund based working capital limits.
- It is issued at a discount to face value.
- CP attracts stamp duty.
- CP can be issued for maturities between 15 days and less than one year from the date of issue.
- CP may be issued in the multiples of Rs.5 lakh.
- No prior approval of RBI is needed to issue CP and underwriting the issue is not mandatory.
- All expenses (such as dealers’ fees, rating agency fee and charges for provision of stand-by facilities) for issue of CP are to be borne by the issuing company