Commercial Paper

Meaning: Commercial Paper (CP) is an unsecured money-market instrument issued in the form of a promissory note. It was introduced in India in 1990 to let highly rated corporate borrowers diversify their short-term borrowing and to give investors an additional instrument. Later, primary dealers and all-India financial institutions were also permitted to issue CP to meet their short-term funding needs.

Who can invest and terms:

• Investors include individuals, banking companies, other corporate bodies (registered or incorporated in India), unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).
• CP can be issued with a maturity of between 7 days (minimum) and up to one year (maximum) from the date of issue.
• It is issued in denominations of ₹5 lakh or multiples thereof.
• The maturity date cannot go beyond the date up to which the issuer's credit rating is valid.

Merits

• Sold on an unsecured basis with no restrictive conditions.
• Freely transferable, so it has high liquidity.
• Provides more funds than some other sources, and its cost to the issuing firm is generally lower than a commercial bank loan.
• Offers a continuous source of funds — maturities can be tailored to the firm's needs, and maturing CP can be repaid by issuing new CP.
• Companies can park excess funds in CP to earn a good return.

Limitations …