COMMERCIAL PAPER

Presented by
Dharani dharan.M
Vijaya kumar S.B
Introduction
 Concept of CP is originated in USA in
19th century.
 Both financial & non-financial, started
to sell.
 Became the 2nd largest money market
instrument in US.
 World’s CP market at the end of
1990’s is US$866.9 billion.
Continu…..
 USA has a largest market share as us
$557.8 billion.
 In India, vaghul working group in
1987 was the 1st to introduce CP.
 RBI accepted the recommendations,
& introduced the scheme of CP in
january 1990.
Types of CP
 CP Unsecured money market
instrument.
 2 major types of CP
 Direct paper- large finance & bank
holding companies
 Dealer paper- security dealers & non-
financial companies
Advantages & Disadvantages
 Interest rates are lower.
 Flexibility.

 Ensures liquidity to the investor with

CRI.
Disadvantages:
 Risk of alienating banks.

 Even financially sound companies has

certain risks in CP.

FEATURES…..
 Eligibility criteria for all corporates.
 the tangible net worth of the
company, as per the latest audited
balance sheet, is not less than Rs. 4
crore.
 company has been sanctioned
working capital limit by banks or all-
India financial institutions;
Contu….
 The borrowal account of the company
is classified as a Standard Asset by
the financing bank/s/ institution/s
Credit Rating.
 Maturity period for CP.
 Credit limit for an CP &denominations
for an CP.
 IPA (issuing & paying agent )
ROLES OF AN ISSUER....
 ROLE & RESPONSIBILITIES OF IPA &
CRA.
 ISSUER:
 (i) Every issuer must appoint an IPA
for issuance of CP.
 (ii) The issuer should disclose to the
potential investors its financial
position as per the standard market
practice.
Contu….
 After the exchange of deal.
 Confirmation between the investor and
the issuer, issuing company shall issue
physical certificates to the investor or
arrange for crediting the
CP to the investor's account with a
depository.
ROLES OF IPA (Issuing & paying
agent)
 (i) IPA would ensure that issuer has
the minimum credit rating as
stipulated by the RBI.
 (ii) IPA has to verify all the
documents submitted by the issuer,
copy of board resolution, signatures
of authorized executants and issue a
certificate that documents are in
order.
Contu…
 (iii) It should also certify that it has a
valid agreement with the issuer
(Schedule III).
ROLES OF CRA…
 (i) Code of Conduct prescribed by the
SEBI for CRAs for undertaking rating
of capital market instruments shall be
applicable to them (CRAs) for rating
CP.
 (ii) Further, the credit rating agency
have the discretion to determine the
validity period of the rating
depending upon its perception about
the strength of the issuer.
Contu..
 (iii) The CRAs can decide the validity
period of credit rating.
 (iv) CRAs would have to closely
monitor the rating assigned to issuers
their track record at regular intervals
and would be required to make its
revision in the ratings public through
its publications and website.
CASE…
 CP was introduced in Japan markets.
 Raising funds from the open markets
through gensaki.
 CP is a promisary note subjected to
LAW OF BILLS.
 Issuing rates where not posted at the
levels of CED. The rates where at
“harakkiri rates”.
Contu….
 Result of the harakiri issue was the
development of very active secondary
market.
 2 major thinks to be emphasized
Japan market.
 First, is about the rating agencies.
 Second, is Business wall between
securities & Banks.