Commercial Paper (CP) is yet another money market instrument in India, which was first introduced in 1990 to enable the highly rated corporates to diversify their resources for short term fund requirements. They are issued either in the form of a promissory note or in a dematerialised form through any of the depositories approved by and registered with SEBI. They are essentially unsecured debt instruments.
Who is eligible to issue commercial papers?
Corporate, Primary Dealers and All India Financial Institutions are eligible to issue CP. To be eligible to issue Commercial Paper, the Corporate need to have a tangible net worth of minimum Rs. 4 Crore. Further,
- the company must have been sanctioned working capital limit by banks or all-India financial institutions
- The borrower account of the company should be high rated i.e. it should be classified as Standard Asset by the Financial Institutions.
Further, the Corporate, Primary Dealers as well as Financial Institutions must 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 FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose.
Denominations and Maturity of Commercial Paper
Maturity of Commercial Paper is minimum of 7 days and a maximum of up to one year from the date of issue. CP can be issued in denominations of Rs.5 lakh or multiples thereof.
Who can Invest in CP?
Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time.
What is return on CP?
CP is issued at a discount to face value as may be determined by the issuer. The difference between issue price and face value is return. Further, CPs are traded in the OTC markets.