Commercial Papers – Meaning, Objective, Features, Maturity Period
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990. CP can be issued in denominations of Rs.5 lakh or multiples thereof. Commercial Papers: What is Commercial Paper in India?, Here we are providing complete details regarding Commercial Papers. Recently we provide Senior citizens savings scheme – Complete features and Section 44AD – Tax on Presumptive Basis
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Commercial Papers – Meaning, Objectives, Features
Objectives of issue of Commercial Papers :
1) To enable highly rated corporate borrowers to diversify their sources of short-term borrowings.
2) To provide an additional instrument to investors.
They can be issued by Corporates, primary dealers and the All India Financial Institutions.
All companies are not allowed to issue these papers. Those corporate bodies which can meet the following criteria may issue CP :
A) The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crores.
B) company has been sanctioned working capital limit by banks or All-India financial institutions
C) the borrowal account of the company is classified as a Standard Asset by the financing banks or institutions.
Who can invest ?
- 2)Banking companies
- 3)Other corporate bodies registered/incorporated in India
- 4)Unincorporated bodies
- 5)Non-resident Indians (NRIs)
- 6) Foreign institutional investors (FIIs) within overall limit set by SEBI
Period open for Commercial Papers :
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.
Rating Requirements :
for issuance of Commercial Paper All eligible participants shall obtain the credit rating from :
- 1) Credit Rating Information Services of India Ltd.,(CRISIL) .
- 2) Investment Information and Credit Rating Agency of India Ltd. (ICRA)
- 3) Credit Analysis and Research Ltd. (CARE)
- 4) Apart from above any such other credit rating agency as may be specified by the Reserve Bank of India from time to time, for the purpose.
The minimum credit rating shall be A-2.
Maturity period :
CP can be issued for maturities between aminimum of 7 days and a maximum of up to one year from the date of issue. However ,the maturity date of the CP should not go beyond the date up to whichthe credit rating of the issuer is valid.
For how much amount can an eligible issuer issue CPs :
An issuer can issue CPs for amount which is least of the following 2:
- 1) Amount approved by its Board of Directors
- 2) Amount indicated by the Credit Rating Agency for the specified rating.
- 1) when the CP is held in physical form, the holder of the CP shall present the instrument for payment to the issuer through the Issuing and paying agent (IPA).
- 2)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.
Other Important points :
- 1. CP can be issued at a discount to face value as may be determined by the issuer.
- 2. CPs are actively traded in Secondary market and Over the counter.