Commercial Paper

Introduction

• Commercial Paper (CP) is a short-term unsecured money market instrument issued in the form of a promissory note (legal instrument). 
• In India, it was introduced in 1990 to enable highly rated corporate borrowers to diversify their short-term sources of borrowing and to provide an additional instrument to investors. 

Issuers of Commercial Papers

• Commercial Paper can be issued by: 

• Corporates (whose tangible net worth is not less than Rs. 4 crores)
• Primary Dealers (PDs)
• All-India Financial Institutions (FIs)

Features of Commercial Papers

• Commercial papers can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue. 
• These can be issued in denominations of Rs.5 lakh or multiples thereof.
• It is a popular instrument for financing working capital requirements of companies.

• It is an unsecured money market instrument (as it is not backed by the government) in the form of a promissory note.
• Commercial Papers normally give a higher return than fixed deposits & Certificate of Deposits.
• Only corporates, who get an investment grade rating (Blue Chip companies) can issue Commercial Papers, as per RBI rules. It is issued at a discount to face value.
• Bank and Financial Institutions are prohibited from issuance and underwriting of Commercial Papers.