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Commercial paper is a short-term unsecured promissory note issued by corporations and

foreign governments for many large, creditworthy issuers. Commercial paper is a low-cost
alternative to bank loans. Issuers are able to efficiently raise large amounts of funds quickly and
without expensive Securities and Exchange Commission (SEC) registration by selling paper,
either directly or through independent dealers, to a large and varied pool of institutional buyers.
Competitive, market-determined yields in notes, whose maturity and amounts can be tailored to
specific needs, can be earned by investors in commercial paper.
Commercial paper has become one of Americas most important debt markets, because
of the advantages of commercial paper for both investors and issuers. Commercial paper
outstanding grew at an annual rate of 14 percent from 1970 to 1991. Commercial paper totaled
$528 billion at the end of 1991.
This chapter describes some of the important features of the commercial paper market.
The first section reviews the characteristics of commercial paper. The second section describes
the major participants in the market, including the issuers, investors, and dealers. The third
section discusses the risks faced by investors in the commercial paper market along with the
mechanisms that are used to control these risks. The fourth section discusses some recent
innovations, including asset-backed commercial paper, the use of swaps in commercial paper
financing strategies, and the international commercial paper markets.
The money market is relevant to the corporate world in terms of short-term surplus or
deficit of funds, which it experience. If a corporate has a short-term surplus, it invests and if it
faces deficit, then it borrows. A corporate needs short-term funds to manage its working capital
requirements, pay taxes and meet other short-term commitments. These needs are fulfilled,
usually, by obtaining short term finance from banks, trade credit from creditors, loans from inter
corporate deposits (ICDSs) market, bill discounting and factoring, etc. corporates are always in
search of new instruments to raise funds that provides them with an optimal combination of low
cost, flexible and desired maturity. One such instrument allowed by RBI in early 90s is the

Commercial paper is a short term, unsecured license promissory note issued at a discount
to face value by well known or reputed companies, who carry a high credit rating and have a
strong financial background. It is an unsecured obligation issued by a bank or corporation to
finance its short-term credit requirements like accounts receivable and inventories and it is
usually issued at a discount reflecting the prevailing market interest rates.
An unsecured, short-term debt instrument issued by a corporation, typically
for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities
on commercial paper rarely range any longer than 270 days. The debt is usually issued at a
discount, reflecting prevailing market interest rates.


1. Issuers
Any private sector companies, public sector units, non-banking companies, primary dealers
(PD), satellite dealers (SDs) etc, can raise funds through the Commercial papers. But the
companies have to satisfy the eligibility criteria prescribed by RBI as discussed later. The
condition laid by RBI restrict the entry of issuers into the CP market.

2. Investors
CPs are generally open to all investors-individuals, banks, corporates and also Non-resident
Indians (NRIs). But NRIs can only invest on a non-reportable and non transferable basis. SEBI
has permitted Foreign Institutional Investors (FIIs) also to invest in corporate debts instruments
like CPs. FIIs were allowed to invest their short-term funds in such instruments too. Within a
ceiling of the $ 1.5 billion of the total FIIs were inflows for debt funds set down by the RBI.
Though the market is open to the above segments, usually, banks, large corporate bodies, public
sector units with investible funds functions in the market.

Commercial papers favor both borrowers and investors. It is considered as an optimal
combination of liquidity and returns in the short-term market. To borrowers it implies low cost of
funds, and to investors it implies liquidity, marketability and returns.

Commercial papers does not originate from a specific self liquidating transaction like

normal commercial bills, which generally arise out of specific trade transaction.

CPs is backed by the liquidity and earning powers of the issuer, but is not backed by any

assets, and hence they are unsecured.


The CP market provides the borrower a cheaper source of funds with less paper work and

formalities when compared to bank finance. Corporate prefer this mode of finance as they can
determine the cost and maturity. Similarly, CP involves less paper work formalities, as it an
unsecured liability, unlike bank finance, which is secured.

Investors prefer to invest in CPs due to high liquidity, varied maturity and high yield

(when compared to bank deposits). The liquidity is high because it can be transferred by
endorsement and delivery.

Commercial paper has a minimum maturity period of 15 days and a maximum of 1 year. Unlike
CD, the issuer can buy back his CP.
CPs are issued in multiples of Rs.5 lakh and the minimum, size of each issue is Rs.5 lakh as
minimum investment.
The CPs are issued to the investors at a discount to the face value. The discount actually is the
effective interest rate. The issue prices determine by the corporate issuing it in the following

manner. Generally the merchant bankers (Issuing and Paying Agent) IPA on behalf of the
corporate client, approaches various investors and takes quotes, and expected amount of
investment for the proposed CP for various maturity. After obtaining the quotas, the merchant
bankers and issuing company compile the data and arrive at an optimal discount rate with a
feasible maturity date of paper. While determining the discount rate, it considers factors such s
prevailing call money rates, prime lending rates, T-bill rates, maturity of the papers and other
relevant expenses (such as brokerage, rating agencys fees, stamp duty, etc). Once the issue price
and maturity are decided, the IPA places the CP with the investors.


There are two major types of commercial paper
1. Direct Paper
2. Dealer Paper

1. Direct Paper:
The Direct Paper is issued by large finance companies and bank holding companies deal
directly with the investor rather than use a dealer as an intermediary.
Though the issuers of direct paper do not have to pay any dealers commission, these
companies must operate a marketing division to maintain constant interaction with active
investors. And also these companies need to pay fees to banks for supporting lines of credit, to
the rating agencies and to agents (i.e. bank trust departments). Hence, this paper must be sold in
large volumes to cover the substantial costs of distribution and marketing.
2. Dealer Paper:
The Dealer Paper is issued by dealers on behalf of their corporate customers. It is mainly
issued by non-financial companies and finance companies. The issuing company sells the paper
directly to the dealer at a discount and commission. The dealer will resell it at the highest

possible price in the market. Companies using dealers to place their paper are generally smaller,
less frequent borrowers than issuers of direct paper. An open rate method is followed by which
the company receives some money in advance but the balance depends on the performance of the
issue in the open market.

A corporate planning to issue CP requires fulfilling the eligibility criteria prescribed by
the RBI, and then it needs to select merchant bankers and an issuing and paying Agent (IPA)
(mandatory) and obtain a resolution from the company board to issue the commercial papers.
After the resolution is passed, the company needs to get t he CP credit rated by one of the
approved credit rating agencies like CRISIL/ICRA/CARE/DCR, as prescribed by RBI. The
company then has to approach its principle bankers with a proposal along with a credit rating
certificate for approval. The banker will then scrutinize the same and verify whether all condition
stipulated by RBI are met, and forward the application to the RBI for intimation.
On the other hand the merchant bankers or issuing or paying agent will locate the clients
and get their quotas for different maturity periods as discussed above. Then the company and
merchant bankers /IPA decide the maturity, discounts rate and the quantum of the issue. A
company can opt a various maturity periods within the stipulated span, i.e, if a company plans to
issue a CP for a span of 6 months, it can raise the money in trances with different maturity
periods of 1 month, 2 month or 3 months, etc. based on the market quotes. If a company decides
on a 2 month CP, it can raise the finance within a period of 2 weeks from the date on which the
proposal is taken on record by the bank and it can issue the paper on a single day or in parts on
different dates (but the whole issue should be redeemed on the same date).
The issue proposed should be completed within a span of two weeks and the company
should intimate the bankers to reduce the working capital limit to the extent of the amount raised.
The company should pay the applicable stamp duty based on the maturity. After the issue is
completed within 3 days, the company should intimate the RBI the actual amount raised through
CPs. The CP is not allowed to be underwritten. On the maturity the holder of the cp presents the
instrument to the paying agent. Who arranges the payment? The agent will receive the amount

and brokerage for the services provided (the brokerage fees charged by them is given below). No
grace periods is allowed for the repayment of the paper. If the maturity dates falls on the
holidays. The issuer is supposed to make payment on the next working day, every issuer of CP is
treated as a fresh issue (including roll over) and the issuer need intimate RBI while doing so.


The paper work involved in raising the funds through the Commercial Paper is very less
because more funds can be procured without any underlying transaction. The flexibility provided
by the instrument enables the company to raise additional funds especially when the market is
favorable. The cost of funds for the company is reduced because it can raise 75% of its working
capital through the Commercial Paper issue at an interest rate lower than the interest rate of
borrowing from the banks. In the cash credit system of lending, the borrowers can reduce the
outstanding amounts and when he gets surplus funds. This results in a reduced effective interest
The companies, which borrow funds through the issue of CP, can take advantage of a
situation by following the money market rates. This is because of the administrative lag in
aligning the back lending rates with the overall interest rate. The companys image will be
improved casting a positive effect on the long-term borrowing programs of the company. The
level of access to the national by banks gives CP market is considered as a key factor to accept
the issue in the international market.
From the investors point of view, the CPs yields relatively higher returns than a similar
maturity banks deposits. Though this security are unsecured, the standby facility its holders
confidence to get the return on the due dates. The holder can get quick payments from the
companys banker on its behalf as soon as the permissible working capital limit is achieved.

1. Who can issue Commercial Paper (CP)

Corporate, Primary Dealers (PDs) and Satellite Dealers (SDs), and the All India Financial
Institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit
fixed by Reserve Bank of India are eligible to issue CP.
A corporate would be eligible to issue CP provided

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 bank/s or All-India financial
institutions; and

The borrowable

account of the company is classified as a Standard Asset by the

financing bank/s/institution/s.
2. Rating Requirement
All eligible participants shall obtain the credit rating for issuance of Commercial Paper
from either the Credit Rating Information Services of India Ltd. (CRISIL) or the Investment
Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research
Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. Or such other Credit Rating Agencies as may
be specified by the Reserve Bank of India from time to time, for the purpose. The minimum
credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. The issuers shall
ensure at the time of insurance of CP that the rating so obtained is current and has not fallen due
for review.
3. Maturity
CP can be issued for maturities between a minimum of 15 days and a maximum up to 1 year
from the date of issue.
4. Denominations
CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by single
investor should not be less than Rs.5 lakh (face value).

5. Limits and the Amount of issue of Commercial Paper

CP can be issued as a stand alone product. The aggregate amount of CP from an issuer shall be
within the limit as approved by its Board of Directors. Banks and FIs will, however, have the
flexibility to fix working capital limits duly taking into account the resource pattern of
companies financing including CPs.
An FI can issue CP within the overall umbrella limit fixed by the RBI i.e., issue of CP together
with other instruments viz., term money borrowings, term deposits, certificates of deposit and
inter-corporate deposits should not exceed 100 percent of its net owned funds, as per the latest
audited balance sheet.
The total amount of CP proposed to be issued should be raised within a period of two weeks
from the date on which the issuer opens the issue for subscription. CP may be issued on a single
date or in parts in different dates provided that in the later case, each CP shall have the same
maturity date.
Every CP issued should be reported to the Chief General Manager, Industrial and Export Credit
Department (IECD), Reserve Bank of India, Central Office, Mumbai through the Issuing and
Paying Agent (IPA) within three days from the date of completion of the issue, incorporating
details as per Schedule II.
Every issue of CP, including renewal, should be treated as a fresh issue.
6. Who can act as an Issuing and Paying Agent (IPA)?
Only a schedule bank can act as an IPA for issuance of CP.
7. Investment in Commercial Paper
CP may be issued to and held by individuals, banking companies, other corporate bodies
registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and
Foreign Institutions (FIIs). However, investments by FIIs would be within the limits set for their
investments by Securities and Exchange Board of India (SEBI).

8. Mode of Issuance
CP can be issued either in the form of a promissory note (Schedule I) or in a dematerialized form
through any of the depositories approved by and registered with SEBI. As regards the existing
stock of CP, the same can continue to be held either in physical form or can be dematerialized, if
both the issuer and investor agree for the same.
CP will be issued at a discount to face value as may be determined by the issuer.
No issuer shall have the issue of Commercial Paper underwritten or co-accepted.

9. Preference for Dematerialized Form

While option is available to both issuers and subscribers, to issue/hold CP in dematerialized or
physical form, issuers and subscribers are encouraged to prefer exclusive reliance on
dematerialized form of issue/holding. Banks, Financial Institutions, PDs and SDs are advised to
invest and hold CPs only in dematerialized form, as soon as arrangements for such
dematerialization are put in place.
10. Payment of Commercial Paper
The initial investor in CP shall pay the discounted value of the CP by means of a crossed account
payee cheque to the account of the issuer through IPA. On maturity of CP, when the CP is held
in physical form, the holder of the CP shall present the instrument for payment to the issuer
through the IPA. However, when the CP is held in demat form, the holder of the CP will have to
get it redeemed through the depository and receive payment from the IPA.
11. Standby Facility
In view of CP being a stand alone product, it would not be obligatory in any manner on the
part of banks and FIs to provide standby facility to the issuers of CP. Banks and FIs would,
however, have the flexibility to provide for a CP issue, credit enhancement by way of standby
assistance/credit backstop facility, etc. based on their commercial judgment and as per terms

prescribed by them. However, these should be within the prudential norms as applicable and
subject to specific approval of the Board.
12. Procedure for Issuance
Every issuer must appoint an IPA for issuance of CP. The issuer should disclose to the potential
investors its financial position as per the standard market practice. 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 investors account with a
depository. Investors shall be given a copy of IPA certificate to the effect that the issuer has a
valid agreement with the IPA and documents are in order (Schedule III).

13. Role and Responsibilities

a. Issuer:
With the simplification in the procedures for CP issuance, issuers would now have more
flexibility. Issuers would, however, have to ensure that the guidelines and procedures laid down
for CP issuance are strictly adhered to.
b. Issuing and Paying Agent (IPA) :
i) IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI and
amount mobilized through issuance of CP is within the quantum indicated by CRA for the
specified rating.
ii) IPA has to verify all the documents submitted by the issuer viz., copy of board resolution,
signatures of authorized executants (when CP in physical form) and issue a certificate that
documents are in order. It should also certify that it has a valid agreement with the issuer
(Schedule III).
iii) Original documents verified by the IPA should be held in the custody of IPA.

c. Credit Rating Agency (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 would henceforth have the discretion to determine the
validity period of rating depending upon its perception about the strength of the issuer.
Accordingly, CRA shall at the time of rating, clearly indicate the date when the rating is due for
iii) While the CRAs can decide the validity period of credit rating, they would also have to
closely monitor the rating assigned to issuers vis--vis their track record at regular intervals and
would be required to make its revised ratings public through its publications and websites.
Fixed Income Money Market and Derivatives Association of India (FIMMDA), as a SelfRegulatory Organization (SRO) for the fixed income money market securities, may prescribe, for
operational flexibility and smooth functioning of CP market, any standardized procedure and
documentation to be followed by the participants, in consonance with the international best
practices. Till such time, the procedures/documentations prescribed by IBA should be followed.
Violation of these guidelines will attract penalties prescribed in the Act by the RBI and may also
include debarring from the CP market.
14. Non-applicability of Certain Other Directions
Nothing contained in the Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 1998 shall apply to any Non-Banking Financial Company (NBFC)
insofar as it relates to acceptance of deposit by issuance of CP, in accordance with these

All endorsements upon the commercial paper must be clear and distinct. Each endorsement
should be written within the space allotted.

Name of the Issuing Company

Stamp duty to be affixed as in force,

in the state in which it is to be issued

Serial No.

Issued at: _____________________ Date of issue: ____________________


Date of Maturity: ___________________________ without days of grace. (If such date

happens to fall on holiday, payment shall be made immediate preceding working day)
For value received ______________________________ hereby
(Name of Issuing Company)
promises to pay __________________
(Name of Investor)

Or order on the maturity date as specified above the sum of Rs __________ (in words)
upon presentation and surrender of this Commercial Paper at______________for and on
(Name of the Issuing and Paying Agent)
behalf of _______________________
(Name of Issuing Comp.)
Authorized Signatory