What is a commercial paper? Enumerate the implications of using commercial paper as a source to raise funds.
Published: June 6, 2019
The ICRA has downgraded the commercial paper of the Dewan Housing Finance Corporation Ltd. to junk grade.
About Commercial Paper
- Commercial Paper is an unsecured money market instrument
- It is issued in the form of a promissory note
- It was introduced in India in 1990
- Primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations
- CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue
- 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
ï¿½Benefits of commercial paper:
- It is a cheaper source of funds
- It helps meet funding requirements relatively quickly for better rated corporates
- Procedural requirements for securing bank facilities and charge creation on assets is not required
- It enables highly rated corporate borrowers to diversify their sources of short-term borrowings and provide an additional instrument to investors
Commercial papers have become one of the popular routes for corporates to raise funds when compared with loans from banks in recent times.
Model Questions Category: 058 - Indian Economy Issues Relating to Planning