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What is Commercial Paper?

by Uddipana Gogoi

Commercial paper is an unsecured promissory note. However, commercial paper is a money market instrument/ money-market security. Initially, the Reserve bank of India Introduced commercial paper in 1990. It facilitates the corporate borrowers to diversify their short term borrowings and also provides short term fixed income investment avenues to the potential investors. Moreover, it is issued at a discount to the face value. Additionally, the eligible issuers of commercial papers are All India Financial Institutions, primary dealers and corporates. But all the corporations are not eligible to issue commercial papers. Thus the conditions for eligibility of corporations for such issue are-

a. firstly, the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore.

b. secondly, company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and

c. finally, the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

Reserve Bank of India specified that all eligible participants shall obtain the 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 Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or other credit rating agency (CRA) from time to time. 

The investors of commercial papers are-

  • Individuals
  • Banking companies
  • Other corporate bodies (registered or incorporated in India) 
  • Unincorporated bodies
  • Non-Resident Indians (NRIs)
  •  Foreign Institutional Investors (FIIs) etc.

Characteristics of commercial papers

  1. It is an unsecured promissory note and a money market instrument.
  2. The time limit of such instruments is 7 days to one year.
  3. It issues at a denomination of Rs. 5 lakhs or multiples thereof.
  4. The eligible issuers are corporates, primary dealers and all India financial intermediaries.
  5. Trading of commercial paper takes place through the over the counter (OTC) market.

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