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Commercial Paper (CP)

Posted by Prashant Shah on April 29, 2011

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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