commercial papersA short term unsecured negotiable instrument consisting of promissory notes With a fixed maturity Generally issued by companies as a means of raising short term debt.Issued at a discounted face value The issuer promises a fixed amount at a future date but pledges no assets

Types of CPsDirect paperDealers paper

ParticipantsIssuers: All private sector company, public sector

units, non-banking companies etc.Investors:Individuals, banks, corporate and also NRI s.Usually banks, large corporate bodies and

public sector units with investible funds participate in CP market.

Features of commercial paper:Commercial paper is a short term money market

instrument comprising usance promissory note with a fixed maturity.

It is a certificate evidencing an unsecured corporate debt of short term maturity.

Commercial paper is issued at a discount to face value basis but it can also be issued in interest-bearing form.

The issuer promises to pay the buyer some fixed amount on some future period but pledges no assets only his liquidity and established earning power, to guarantee that promise.

Commercial paper can be issued directly by a company to investor or through banks/merchant bankers.

Advantages of commercial paper:Simplicity: The advantage of commercial paper lies in its

simplicity. It involves hardly any documentation between the

issuer and investor.Flexibility: The issuer can issue commercial paper with the

maturities tailored to match the cash flow of the company.

Diversification: A well rated company can diversify its source of

finance from banks to short-term money markets at somewhat cheaper cost.

Easy to rise long-term capital: The companies which are able to raise funds

through commercial paper become better known in the financial world and are thereby placed in a more favorable position for raising such long-term capital as they may, from time to time, require.

Thus there is an inbuilt incentive for companies to remain financially strong.

High returns: the commercial paper provides investors with

higher returns than they could get from the banking system.

Movement of funds: Commercial paper facilities securitization of

loans resulting in creation of a secondary market for the paper and efficient movement of funds providing cash surplus to cash deficit entities.

Commercial paper in IndiaIn India, on the recommendations of vaghul

working group, the RBI announced on 27th march,1989 that commercial paper will be introduced soon in Indian money market.

1.there is a need to have limited introduction of commercial paper.

2. initially, access to the commercial paper market should be restricted to rated companies having a net worth of 5crore and above with good dividend payment record.

The commercial paper market should function within the overall discipline of CAS.

The RBI would have to administer the entry on the marker, the amount of each issue and the total quantum that can be raised in a year.

No restriction be placed on the participants in the commercial paper market except by way of minimum size of the note.

Commercial paper should be excluded from the stipulation on unsecured advances in the case of banks.

Procedure & time frame for issue of commercial paper Application to RBI through bank.RBI to communicate in writing their decision on the

amount of commercial paper to be issued to the leader bank.

Issue to be completed within 2 weeks from the date of approval of RBI through Pvt placement.

Issue may be spread over 2 weeks on due date but all such commercial paper shall bear the some maturity date.

Issuing company to advise RBI through a bank amount of actual issue of CP within 3days of completion of the issue.

Implication of CP: Borrowers can get atleast 20% of working capital from market increase advance from bank interest.

1st class borrowers prestige of jointy CP club with approval of CRSIL,banking system & Return on investment. sc

Issue of CP outside scheme of bank finance.Main aim of RBI to ensure CP develops a

sound money market instrument. Implications on bank: Banks themselves can

invest inCP & show this as short term investment.

Banks gain by increase interest rate done during busy season & by service charges & paying commission.

Impact on economy: Large company & banks operate in competitive atmosphere with more efficiency result in excellence in services of banks & management of finance by company.

Recent trends: liberalised CP terms may 30, 1991.Not require approval of RBI.Minimum working capital limit reg by a company to 5CroresIncrease 75% of working capital.

Features of Commercial paper in INDIA:Same company are using this market for

funds.Banks hold till maturity no secondary market

is allowed.Removal of stringent conditions & regulatory

measures to issuers , investors, & dealers will improve CP as a source of corporate financing.