Commercial paper in

India

Commercial Paper in India is a new

addition to short-term instruments in
Indian Money market since 1990 onward.
The introduction of Commercial paper as
the short-term monetary instrument was
the beginning of a reform in Indian Money
market on the background of trend of
Liberalization which began in the world
economy during 1985 to 1990. A
commercial paper in India is the monetary
instrument issued in the form of
promissory note.[1] It acts as the debt
instrument to be used by large corporate
companies for borrowing short-term
monetary funds in the money market. An
introduction of Commercial Paper in
Indian money market is an innovation in
the Financial system of India. Prior to
injection of Commercial Paper in Indian
money market i.e. before 1990, the
corporate companies had to depend upon
the crude and traditional method of
borrowing working capital from the
commercial banks by pledging the
inventory of raw materials as Collateral
security. It involved more loss of time for
the borrowing companies in availing the
short-term funds for day-to-day production
activities. The commercial paper has
become effective instrument for these
corporate companies to avail the short-
term funds from the money market within
shortest possible time limit by avoiding
the hassles of direct negotiation with the
commercial banks for availing the short-
term loans.

Commercial Paper market

The introduction of commercial paper as
debt instrument has promoted commercial
paper market as one of the components of
Indian money market. In this commercial
paper market, the issuers of commercial
paper create supply while the subscribers
to commercial paper create demand for
these papers. The interaction between
supply and demand for commercial
papers promotes the commercial paper
market. The main issuers of Commercial
paper in this market are incorporated
manufacturers and the main subscribers
to the Commercial papers are the banking
companies. Commercial Paper is issued
by the issuers at a discount to face value
of Commercial paper. The face value of
Commercial Paper is in the denomination
of Rs. 0.5 million and multiples thereof.
The maturity period of Commercial paper
in the Commercial Paper market ranges
between minimum of 7 days and
maximum of 1 year from the date of
issue.[2] The subscriber to the commercial
paper is the investor, and a single investor
in the Commercial paper market is not
allowed to invest less than Rs. 0.5 million.
The other issuers of Commercial paper in
this market are Primary dealers and All
India Financial Institutions. The other
investors or subscribers to Commercial
paper in this market are individuals, Non-
Resident Indians and Foreign Institutional
Investors.

Commercial Paper and Credit

Rating agencies
All eligible participants shall obtain the
credit rating for issuance of Commercial
Paper either from 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 India Ratings & Research Pvt. Ltd.
(Ind-Ra) or such other credit rating agency
(CRA) as may be specified by the Reserve
Bank of India from time to time, for the
purpose.

The minimum credit rating shall be A-3[3]

[As per rating symbol and definition
prescribed by Securities and Exchange
Board of India (SEBI)].

The issuers shall ensure at the time of

issuance of CP that the rating so obtained
is current and has not fallen due for
review.[4]

Issuers of Commercial Paper

The issuers of Commercial papers in
Indian money market are broadly
classified into:

Leasing and Finance Companies

Manufacturing companies
Financial Institutions

During the decade of 2000-01 to 2010-11,

Leasing and finance companies had the
average share of 70% of total issue of
Commercial papers; while Manufacturing
companies and Financial institutions had
the average share of 15% each.[5]

Growth of Commercial Paper

market in India