DEFINITIONS :
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.
1. 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.
2. An unsecured and unregistered short-term obligation issued by an institutional borrower to investors who have temporarily idle cash.
3. Short-term, unsecured, discounted, and negotiable notes sold by one company to another in order to satisfy immediate cash needs.
INTRODUCTION:
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 –
1. the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore
2. company has been sanctioned working capital limit by banks or all-India financial institutions
3.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
Commercial Paper Yields
Like Treasury Bills, yields on commercial paper are quoted on a discount basis—the discount return to commercial paper holders is the annualized percentage difference between the price paid for the paper and the par value using a 360-day year. Specifically: icp(dy) = [(Pf - P0)/Pf] x (360/h)
and when converted to a bond equivalent yield:
icp(bey) = [(Pf - P0)/P0] x (365/h)
where
Pf- Face value
Po – price paid by investor
h- term length in days
