What is Commercial Paper?
A Commercial Paper (CP) is a short-period 90 to 364 day, unsecured promissory note that is issued by a company to raise funds (usually for the inventories, finance, and temporary liabilities). It is issued by one organization (Primary Dealers (PD) and All-India Financial Institutions (FIs) in India) to another organisation, insurance businesses, pension funds, and banks. The money raised by commercial paper is often huge. Due to the fact that this loan is entirely unsecured, the CP may only be issued by companies with a solid credit rating.
Table of Content
- Features of Commercial Paper
- Types of Commercial Paper
The Reserve Bank of India controls the issuance of Commercial Paper. The RBI first issued commercial paper to the Indian money market on March 27, 1989. Based on the points given below, commercial Paper was first recommended by the Vaghul Working Group:
- The registration of commercial papers should only be permitted for companies with a net worth of at least ₹5 cores and an excellent dividend payment record.
- The CAS discipline ought to be adopted by the market. The total quantum that can be upgraded in a year, the paper amount, and market access should all be managed by the RBI.
- Other than the smallest note size, there are no restrictions on the market for commercial paper. However, the amount of one issue and each lot cannot be less than ₹1 crore and ₹5 lakhs, respectively.
- The net worth of the company using commercial paper should be at least ₹5 crores, a maximum debt ratio of 105, a debt serving ratio of around 2, and a minimum current ratio of 1033. Besides, it should also be recorded on the stock exchange.
- The commercial paper can be made at a discounted rate to the face value or in interest terms.