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COMMERCIAL PAPER (CP)

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Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. In India, it was introduced in 1990s as a privately placed instrument. CP enables the borrowers to meet their short – term funding requirement for operations. In the Global Market, it is very useful instrument with the fixed maturity period of not more than 270 days. 

Commercial paper is a money – market security issued (sold) by large corporation houses to get money to meet short – term debt obligations and is only backed by an issuing bank or corporation‟s promise to pay the face amount on the maturity date. 

Who shall issue CP?

Corporate Houses, Primary Dealers and Financial Institutions can issue CP provided they have permission from the Reserve Bank of India. 

Note: A corporate house has the tangible net worth of not less than Rs.4 Crores and the company also has sanctioned working capital by the Bank. 

Rating Requirement: The issuing company shall obtain credit rating for issuance of CP from one of the credit rating agency i. e. CRISIL, ICRA, CARE and FITCH. The credit rating shall not be less than “A2”. 

Maturity: These can be issued for a minimum period of 7 days and maximum period of 1 year.

Denominations: CPs can be issued in denominations of Rs.5 lakh or multiples thereof. 

Investment in CPs: CPs are issued to individuals, banking companies, other corporate bodies, NRIs and FIIs. 

Procedure for Issuance 

(i) First of all, the issuer must obtain an Issuing and Paying Agent (IPA);

(ii) The financial position must be disclosed by the issuer to the potential investors;

(iii) Physical certificates shall be issued to investor by issuer after the confirmation of the deal;

(iv) Investors shall also be given a copy of IPA certificate. 

Roles and Responsibilities  Issuer: It is the duty of the issuers to ensure that the guidelines and procedures laid down for the issue of CP are strictly followed. 

Issuing and Paying Agent: Only a scheduled bank has the right to act as an IPA. 

(i) IPA should ensure that issuer has the minimum credit rating as stipulated by the RBI.

(ii) The entire document should be verified by an IBA.

(iii) Certified copies of original document should be held in the custody of IBA.

(iv) All the IPAs report about every CP issue to Chief General Manager within 3 days.

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