Commercial Paper (CP)

Commercial paper performs the financial disintermediation function. CP is a short-term instrument, introduced in 1990, to enable non-banking companies namely Corporates, Financial Institutions (FIs), Primary Dealers (PDs) to borrow short-term funds through liquid money market instruments. CPs were intended to be part of the working capital finance for corporates.

 

Features of CP:

1. CP can be issued either in the form of a usance promissory note or in a dematerialized form through any of the depositories approved by and registered with SEBI.
2. Issued subject to minimum of Rs 5 Lakh (face value) and in the multiples of Rs. 5 Lakh thereafter,
3. Maturity is 7 days to 1 year
4. Unsecured and backed by credit of the issuing company
5. CP may be issued on a single date or in parts on different dates provided that in the latter case, each CP shall have the same maturity date.

Who can invest in CP?

1. Individuals,
2. Banking companies,
3. Other corporate bodies registered or incorporated in India
4. Non-Resident Indians and Foreign Institutional Investors (However, investment by FIIs would be within the limits set for their investments by SEBI).

Factors affecting price of CP:

1. Call money market rates
2. Competing money market investment products
3. Liquidity
4. Credit rating

Calculations are same as we did for treasury bill as CPs are also issued at discount to face value.

Who is eligible to issue CP:

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 bank/s or all-India financial institution/s; and
3. the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

The minimum required credit rating for CP is P2 by CRISIL or equivalent if rated by other rating agency.

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Treasury Bill

Treasury bills are a class of Central Government Securities. These securities are issued by the RBI on behalf of the government of India but it belongs to Government only. It is issued in the form of promissory notes or credited to Subsidiary General Ledger (SGL) account of the holder. As this instrument belongs to Government and having shorter maturity is considered virtually risk free.They are the most liquid instruments after cash.The main investors are banks cause T-bills are eligible for Statutory Liquidity Ratio (SLR).

 

Who can invest in treasury bills?

 

All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organizations, Nepal Rashtra bank and individuals are eligible to bid and purchase Treasury bills.

Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof.

 

Types of treasury bills:

1. Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year.
2. They are thus useful in managing short-term liquidity. 
3. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day
4. There are no treasury bills issued by State Governments.

Auction of treasury bills:

1. T-bills are sold through an auction process announced by the RBI at a discount to its face value (face value is Rs.100 for treasury bills)
2. RBI issues a calendar of T-bill auctions
3. It also announces the exact dates of auction, the amount to be auctioned and payment dates.

Auction calendar:

Notified amount for auction of Treasury Bills (April 1, 2011 to June 30, 2011)
(` Crore)
Date of Auction	91 Days	182 Days	364 Days	Total
6-Apr-11	4,000		2,000	6,000
13-Apr-11	4,000	2,000		6,000
20-Apr-11	4,000		2,000	6,000
27-Apr-11	4,000	2,000		6,000
4-May-11	5,000		2,000	7,000
11-May-11	5,000	2,000		7,000
18-May-11	5,000		2,000	7,000
25-May-11	5,000	2,000		7,000
1-Jun-11	5,000		2,000	7,000
8-Jun-11	5,000	2,000		7,000
15-Jun-11	5,000		2,000	7,000
22-Jun-11	5,000	2,000		7,000
29-Jun-11	6,000		2,000	8,000
Total	62,000	12,000	14,000	88,000

 Source: www.rbi.org.in

Calculation of Yield:

Yield = [(FV-P)/P]*(365/N)*100

Where,

• FV= Face value
• P= Price
• N= Days to maturity

 Let say 91 day treasury bill is issued at a price of Rs.98. What will be the yield?