• Commercial paper consists of short-term,
unsecured promissory notes issued by well-
known and financially strong companies.
• Commercial paper is traded mainly in the
primary market. Opportunities for resale in
the secondary market are more limited.
• Commercial paper is rated prime, desirable, or
satisfactory, depending on the credit standing
of the issuing company.
• CP can be issued for maturities between a minimum of 7
days and a maximum of up to one year from the date of
• Commercial paper is usually sold at a discount from face
value, and carries higher interest repayment rates
Question arises in mind, why it was
• It was introduced in India in 1990 with a view
to enabling highly rated corporate borrowers
to diversify their sources of short-term
borrowings and to provide an additional
instrument to investors. Subsequently,
primary dealers and all-India financial
institutions were also permitted to issue CP to
enable them to meet their short-term funding
requirements for their operations.
Types of Commercial Paper
• There are two major types of commercial
• Direct paper is issued mainly by large finance
companies and bank holding companies
directly to the investor.
• Dealer paper, or industrial paper, is issued by
security dealers on behalf of their corporate
customers (mainly nonfinancial companies
and smaller financial companies).
Structure of the Commercial Paper Market
Supply Side Demand Side
Investors in commercial
Issuers of commercial
paper Direct or finance paper Money market funds
Finance companies Banks
Bank holding companies Insurance companies
Paper Other investors
Dealer or houses
Maturities & Rate of Return
• Most commercial paper is issued at a discount
from par, and yields to the investor are
calculated by the bank discount method, just
like Treasury bills.
Growth of Commercial Paper
• The volume of commercial paper has grown
rapidly due to its relatively low cost and high
quality, as well as the expanding use of credit
Year of Paper in the U.S.
1960 $ 4.5 billion
1990 562.7 Effect of
2000 1,615.3 weaker economy &
Commercial paper represents one way for large firms
to borrow money for the short term.
companies issue the commercial paper for less than
its face value and buy back the paper at its face
Commercial paper are cheaper than a bank loan.
It is available only to a few selected blue chip and
By issuing commercial paper, the credit available
from the banks may get reduced.
Issue of commercial paper is very closely
regulated by the RBI guidelines.
Who can issue Commercial Paper (CP)
• Highly rated corporate borrowers, primary
dealers (PDs) and satellite dealers (SDs) and
all-India financial institutions (FIs)
Eligibility for issue of CP
a) The tangible net worth of the company, as per
the latest audited balance sheet, is not less than
Rs. 4 crore;
b) The working capital (fund-based) limit of the
company from the banking system is not less
than Rs.4 crore
c) And the borrower account of the company is
classified as a Standard Asset by the financing
To whom issued
• CP is issued to and held by individuals,
banking companies, other corporate bodies
registered or incorporated in India and
unincorporated bodies, Non-Resident Indians
(NRIs) and Foreign Institutional Investors (FIIs).
• CPs are issued by companies in the form of usance
promissory note, redeemable at par to the holder on
• The tangible net worth of the issuing company should be not
less than Rs.4 crore.
• Working capital (fund based) limit of the company should
not be less than Rs.4 crore.
• Credit rating should be at least equivalent of
P2/A2/PP2/Ind.D.2 or higher from any approved rating
agencies and should be more than 2 months old on the date
of issue of CP.
• Corporate are allowed to issue CP up to 100% of
their fund based working capital limits.
• It is issued at a discount to face value
• CP attracts stamp duty.
• CP can be issued for maturities between 15 days and
less than one year from the date of issue.
• CP may be issued in the multiples of Rs.5 lakh.
• No prior approval of RBI is needed to issue CP and
underwriting the issue is not mandatory.
• All expenses (such as dealers’ fees, rating agency fee
and charges for provision of stand-by facilities) for
issue of CP are to be borne by the issuing company
SOLAR INDUSTRIES INDIA LIMITED Issue
of Commercial Papers(Example)
• On January 27, 2010, the Board considered
the Issue of Commercial papers and decided
to issue commercial papers of 50.00 Corers.
Board further appointed CRISIL as Credit
Rating Agency for issuing Credit Rating to the
Company in respect of Commercial Paper
Issue. Board also appointed Link In time India
Private Limited to Act as Registrar & Transfer
Agent for this Issue.