Commercial Paper

Commercial Paper



Short-term debt instruments of up to one-year maturity — popularly known as the commercial papers (CP) — are fast replacing bank credit for short-term capital requirements of top rated companies. Commercial paper, in the form of promissory notes issued by corporations, have existed since at least the 19th century. For instance, Marcus Goldman, founder of Goldman Sachs, got his start trading commercial paper in New York in 1869

CP is a money market instrument issued in the form of a promissory note and transferable by endorsement and delivery. Commercial Paper was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings as also to provide an additional instrument to investors. Issue of CP is governed by the Non-banking Companies (Acceptance of deposits through Commercial Paper) Directions 1989. As per the Directions issued by the Reserve Bank of India, CP can be issued only for raising working capital finance.

Commercial Paper is a money-market security issued (sold) by large corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or corporation's promise to pay the face value on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries shorter repayment dates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates

Advantage of commercial paper:



i. High credit ratings fetch a lower cost of capital. CP gives highly rated companies access to cheaper funds as compared to the working capital finance from banks or other sources.

ii. Wide range of maturity provides more flexibility.

iii. It does not create any lien on asset of the company.

iv. Tradability of Commercial Paper provides investors with exit options.

v. It minimizes documentation requirements. The maturity of CP can be suitably adjusted as per the cash flow requirements of the issuers.

 

[Dhruv Bindhani]

Commercial Paper



Short-term debt instruments of up to one-year maturity — popularly known as the commercial papers (CP) — are fast replacing bank credit for short-term capital requirements of top rated companies. Commercial paper, in the form of promissory notes issued by corporations, have existed since at least the 19th century. For instance, Marcus Goldman, founder of Goldman Sachs, got his start trading commercial paper in New York in 1869

CP is a money market instrument issued in the form of a promissory note and transferable by endorsement and delivery. Commercial Paper was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings as also to provide an additional instrument to investors. Issue of CP is governed by the Non-banking Companies (Acceptance of deposits through Commercial Paper) Directions 1989. As per the Directions issued by the Reserve Bank of India, CP can be issued only for raising working capital finance.

Commercial Paper is a money-market security issued (sold) by large corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or corporation's promise to pay the face value on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries shorter repayment dates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates

Advantage of commercial paper:



i. High credit ratings fetch a lower cost of capital. CP gives highly rated companies access to cheaper funds as compared to the working capital finance from banks or other sources.

ii. Wide range of maturity provides more flexibility.

iii. It does not create any lien on asset of the company.

iv. Tradability of Commercial Paper provides investors with exit options.

v. It minimizes documentation requirements. The maturity of CP can be suitably adjusted as per the cash flow requirements of the issuers.

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