Commercial Paper Explained; Objectives, Maturity
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990. It can be traded in Over the Counter (OTC) market. Fixed Income Money Market and Derivatives Association of India (FIMMDA), may prescribe, in consultation with the RBI, any standardised procedure and documentation for operational flexibility and smooth functioning of CP market. CP is issued at a discount to face value as may be determined by the user and is freely transferable.
Objective of Commercial Paper
It was introduced with a view to enabling highly rates corporate borrowers to diversify their sources of short term borrowings and to provide an additional instrument to investors.
Who can issue CP?
The following entities can issue Commercial Papers:
- Primary dealers (PDs)
- All-India Financial Institutions (FIs)
These entities are permitted to issue CP to enable them to meet their short-term funding requirements for their operations.
Maturity period of CP
The maturity profile of CP is:
- Minimum period: 7 days
- Maximum period: 1 year
CP can be issued in denominations of Rs.5 lakh or multiples thereof. There is no minimum limit.
Who can invest in CP?
Any of the following entities can invest in commercial papers:
- Banking companies
- Other corporate bodies (registered or incorporated in India) and unincorporated bodies
- Non-Resident Indians (NRIs)
- Foreign Institutional Investors (FIIs) etc.
However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time
Mode of issuance
CP can be issued either in the form of a promissory note or in a dematerialised form.
Issuing and Paying Agent (IPA)
Only a scheduled bank can act as an IPA for issuance of CP.
We hope you liked this article. Here are some useful articles for you to read next:
- Certificate of Deposit (CD) Explained
- History of Banking in India
- Banking Structure in India
- Non-Banking Financial Companies (NBFCs)
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