What is Commercial Paper? Who can issue them?

Planning

oi-Sneha

By Sneha B K

Published: Friday, January 18, 2013, 12:58 [IST]

Commercial Paper is unsecured money market instrument issued in the form of promissory note. This was introduced in a aim enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.

The interest rate on commercial papers are usually linked to the yield on the one-year government bond. Not all the companies are eligible to issue CP.

Eligibilty to issue CP

• The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore.
• The company has been sanctioned working capital limit by bank/s or FIs; and
• The borrowal account of the company is classified as a Standard Asset by the financing bank/institution.

Characteristics of Commercial Paper

• CP are negotiable instruments and hence they are flexible.
• All eligible participants Should obtain credit rating for issuance of Commercial Paper either from Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd.
• CP are issued in denominations of Rs.5 lakh or multiples thereof.
• CP can be invested by 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.
• However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time.

However, these are risky instruments as they are not backed by assets. So, its investors who are less averse to risk should avoid this. Only blue chip companies, banks, corporation use this.

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