COMMERCIAL PAPER

Presented by Shajina m v Roll No:21

Introduction
Financial liberalization results innovation in financial instruments. Trend towards securitization
Main advantage is cheaper to borrow

Meaning

Commercial paper is a debt instrument issued by an organization to raise short-term funds to meet current expenditure needs.

Participants
Issuers (who issue CP)
E.g.: private sector company, PSU, Non banking company

Investors (who invest in CP)

E.g.: individuals, banks, corporate, NRIs

Features
Short term money market Certificate of unsecured corporate debt Issued normally at a discount; interest bearing one The issuer promises to pay some fixed amount on some future period The CP issued directly by the company or through the banks/merchant bankers

Advantages
Simplicity Flexibility Diversification Easy to raise long term capital High returns Movement of funds

RBI Guidelines

1. Eligibility of the company for issuing CP It has a tangible net worth of 10 crores or more Minimum current ratio of 1.33:1 It has fund based working capital limit of Rs.25 crores or more A debt servicing ratio closer to 2 The company is listed on a stock exchange Subject to CAS discipline It is classified under Health Code No 1 by the financing bank The company would need to obtain P1 from CRISIL

2. CP should Issued in multiples of Rs.25 lakhs & minimum amount by a single investor shall be Rs. 1 crore 3. Period extend from 7 days to 6 months (there is no grace period) 4. The total fund shall not exeed 20% of the issuers fund based working capital

5. CP is issued in the form of usance promissory notes 6. It cannot be underwritten 7. Investment in CP can be made by any person or body corporates 8. The issuing company would be required to ensure that the relevant provisions of the various statutes such as the Companys Act1956,the IT Act 1961,and the NI Act 1981 are complied with

Procedure and time frame for issue

Application to RBI along with certificate from credit rating agency RBI to communicate in writing their decision on the amount of CP to be issued Issue of CP completed within 2 weeks The issue may be spread over two weeks but matured on same maturity date