Commercial Paper in Detail

Commercial paper, also called CP, is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year  It is a money market instrument that is issued in the form of promissory note & generally comes with a maturity of up to 270 days.

It was introduced in India in 1990 with a view to enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

FEATURES OF COMMERCIAL PAPER
  1. Commercial paper is a short-term, unsecured debt instrument with a duration of 1-270 days.
  2. Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP.
  3. CPs have a minimum maturity of seven days and a maximum of up to one year from the date of issue.However, the maturity date of the instrument should typically not go beyond the date up to which the credit rating of the issuer is valid.
  4. It is usually sold at a discount to its face value and is a cheaper alternative to other forms of borrowing.
  5. They can be issued in denominations of Rs 5 lakh or multiples thereof.
TYPES OF COMMERCIAL PAPER

Commercial paper are divided into 4 different types :-

DRAFT :- A draft is an unconditional written order by one person (the drawer) directing another person (the drawee) to pay a certain sum of money on demand to a named third person (the payee) .

CHECK :- This is a special form of the draft where the drawee is a bank.

NOTE :- In this instrument, a promise is made by one person to pay a certain sum of money to another.

CERTIFICATE OF DEPOSIT :- A CD is an instrument wherein the bank acknowledges the receipt of deposit.

ADVANTAGES :-
  1. It allows the diversification of funds in short-term instruments.
  2. It is highly reliable and does not have any limiting condition.
  3. It can be issued quickly and cheaply.
DISADVANTAGES :-
  1. It can be issued by investment-grade banks and large corporations only. Hence it is not a source of fund which is available to all.
  2. Small investors cannot directly invest in commercial paper.

Thus, commercial paper is simply an unsecured form of promissory note issued by large banks or corporations to meet their short term financial obligations.

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