personal finance

Everything you need to know about commercial papers


Debt mutual fund schemes hold commercial paper (CP) as instruments in their portfolios.


What is a commercial paper?


Commercial paper, or CP, is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year. It is an unsecured money market instrument issued in the form of a promissory note and was introduced in India in 1990. Corporates which enjoy a high rating can diversify their sources of shortterm borrowings using CPs. Investors get an additional instrument. It is typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations, such as funding for a new project.

What denomination can commercial paper be issued?

CPs have a minimum maturity of seven days and a maximum of up to one year from the date of issue. However, the maturity date of the instrument typically should not go beyond the date up to which the credit rating of the issuer is valid. They can be issued in denominations of ₹ 5 lakh or multiples thereof.

What rating requirements does a company coming with a CP need?

Any company keen to raise funds through CP needs to obtain the credit rating either from CRISIL, ICRA, CARE, FITCH or any other credit rating agency (CRA) that may be specified by RBI. The minimum credit rating shall be A-2 as per Sebi guidelines. The issuers also needs to ensure that at the time of issuance of Commercial Paper the rating so obtained is current and has not fallen due for review.

Since such instruments are not backed by collateral, only firms with high credit ratings from a recognised rating agency will be able to sell their commercial paper at a reasonable price. CPs are usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing company or institution would have to pay. Interest rates will tend to fluctuate with market conditions, but will be lower than banks’ rates.

Who can invest in CP?

Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, non-resident Indians and foreign institutional investors etc can invest in CPs.

However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India from time to time.





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