consisting of promissory notes with a fixed maturity issued to raise cash by a large business firms that has high credit rating/standing. .€ Commercial Paper is a short-term. € In India. RBI introduced the commercial paper scheme in the Indian money market in 1989. on the recommendation of the Vaghul Working Group. unsecured negotiable instrument. they are called dealer paper. When CPs are issued by security dealers. A CP when issued by a company directly to the investors is called a direct paper.

€ The buyers of commercial papers include banks. unit trusts and firms with surplus funds to invest for a short period with minimum of risk. . insurance companies.

2. and proves to be handy during periods of tight bank credit. are two important advantages of commercial papers from the issuing firm¶s point of view: It is an alternative source of raising short-term finance. it provides an opportunity to make a safe.€ There 1. . It is a cheaper source of finance in comparison to the bank credit. short-term investment of surplus funds. € From an investor¶s point of view.

the RBI regulates the issue of commercial papers.In India. The main elements of the present framework are given below: CPs can be issued for periods ranging between 7 days and one year. A2 (ICRA). The minimum size of an issue is ` 25 lakh and the minimum unit of subscription is ` 5 lakh.33:1 or more. a fund-based working limit of ` 4 crore or more. at least a credit rating of P2 (CRISIL). . Current Ratio of the company should be 1. A company can issue CPs only if it has a minimum tangible net worth of ` 4 crore. PR2 (CARE) and D-2 (Duff & Phelps). The maximum amount that a company can raise by way of CPs is 100 per cent of the working capital limit. Renewal of CPs is treated as fresh issue.

dealing bank fee (0.25 to 0.1.25 per cent) and stand by facility (0.€ Borrowable A/C is classified under Health Code No. rating charges (0.1 to 0.2 per cent). negotiable by endorsement and delivery at a discount rate freely determined by the issuer.5 per cent).25 per cent). € The CPs should be issued in the form of usance promissory notes. The rate of discount also includes the cost of stamp duty (0. . € The holder of the CPs would present them for payment to the issuer on maturity.

rating charges. their effective pre-tax cost/interest yield = (Face Value - Net Amount Realized) ( 360 ) (Maturity Period) (Net Amount Realized) where net amount realized = Face Value ± discount ± issuing and paying agent charges.€ As the CPs are issued at discount and redeemed at its face value. that is. . and fee for stand by facility. dealing bank fee. stamp duty.

€ Every company proposing to issue CPs should submit the proposal in the form prescribed by the RBI to the bank which provides working capital along with credit rating of the company. The company has to advise the RBI through the bank. takes the proposal on record. The issue has to be privately placed within two weeks by the company or through the offices of a merchant banker. of the amount of CPs issued within 3 days. The initial investor pays the discounted value of the paper to the account of the issuing company with the bank in writing. . The bank scrutinize the application and on being satisfied that the eligibility criteria are met and conditions stipulated are compiled with.

5 5.7 .15 11. 2003 31 March. 1999 31 March.50 10. 1993 31 March.22 ² 15.41 ² 1.01 ² 12.25 14.55 .00 . 2005 577 3264 604 76 646 1500 4770 5663 5846 7224 5749 9131 13419 15. 1994 31 March. 2004 31 March.75 ² 11.00 ² 15. 1995 31 March.00 ² 12. 1996 31 March. 2001 31 March.7.6.25 7. 1997 31 March.76 ² 16.Year Ended Total Outstanding Rate of Discount 31 March. 2000 31 March.33 .00 8.00 11.20 ² 20.05 ² 11.75 4.00 20. 2002 31 March.00 14.50 10.6.25 6.25 ² 12. 1998 31 March.

The denominations of CP should be reduced further for the growth of secondary market for CP. . For further development of CP market. UK and France and RBI has to relax the stringent Credit Rating norms from the present Credit rating P2 of CRISIL to P3.€ The concept of raising money through commercial paper was know to the US markets since 20th century. since credit rating is not compulsory in many countries like US. the RBI constantly watching the growth of the CP market and it is modifying the guidelines from time to time. the stamp duty on CP should be abolished since there is no stamp duty in US. On our country though it was introduced in 1990. UK and France.

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