What is Commercial Paper? Use and Maturity

commercial paper

What is Commercial Paper?

Commercial paper is a short term unsecured promissory note issued by the firm to raise the short term finance. It is an important money market instrument. However, only high creditworthy company can issue it. In India, on the recommendation of Vaghul Working Group, RBI comes up with commercial paper scheme in the year 1989.

Commercial Paper market in USA is a blue chip market, however in India also, it is growing on a very fast pace. The buyers are banks, insurance companies, unit trusts and firm with surplus funds.

Features of Commercial Paper

  • An alternative source of raising short term finance and quite effective at the time of tight ban credit.
  • Cheaper source of finance in comparison to the bank credit.
  • Always available for large and high rated companies.
  • It cannot be redeemed until maturity. So, if a firm doesn’t need the firm anymore, it cannot repay until the maturity gets over.

Use and Maturity of Commercial Paper

In India, RBI regulates the issue of commercial paper. Only those companies are allowed to issue who have the net worth of 100 million, maximum permissible bank finance of not less than 25 crore and are listed on stock exchange. In addition to this, the size of the issue should be at least 1 crore and each CP should not be less than 5 lakh.

The norms also says that only large and high rated companies can deal in this market. A company can issue CP’s amounting to 75 per cent of the permitted bank credit.

What is the maturity of Commercial Papers?

In India, the maturity of CPs varies from 91 to 180 days. On the other hand, in US market, the maturity varies from 1 to 270 days. In India, CPs are mostly used for short term financing or as an alternative source of finance to bank credit and other short term sources.

Since 1993, CP market has significantly increase in India because of the large funds available from the banking sector as well as limited availability of other assets. As per RBI, the CP amount outstanding in 2000 was 7,814 crore.

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