Ask NiyaCommercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in 1990 to enable highly rated corporate borrowers to diversify their short-term borrowing sources and offer investors a new avenue of investment.
Later, primary dealers and satellite dealers were also allowed to issue CPs to meet short-term funding needs for their operations.
CPs are issued with a fixed maturity ranging from 15 days to 1 year, and are commonly used for financing accounts receivables, inventories, and other short-term liabilities.
Example: A company with Rs. 3 lakhs in receivables (with a 6-month credit period) may issue a CP at a 10% discount. The buyer earns Rs. 10,000 in 6 months, while the company gains immediate liquidity without waiting for receivables to mature.
CPs typically offer higher yields than Treasury Bills (T-Bills) but carry slightly more risk due to the lack of collateral. Only firms with high credit ratings can issue CPs without offering heavy discounts.
CPs were introduced on April 24, 1990, with the aim of broadening the primary market and enhancing the scope of the secondary market.
The tangible net worth of the issuing company must be at least Rs. 5 crore (down from Rs. 10 crore).
The fund-based working capital limit must be at least Rs. 15 crore (reduced from Rs. 25 crore).
The denomination of CPs was set at multiples of Rs. 10 lakh (down from Rs. 25 lakh), with a minimum issue size of Rs. 50 lakh per investor (previously Rs. 1 crore).
On May 30, 1991, several changes were implemented to further ease the issuance of commercial papers.
The working capital requirement for issuing CPs was reduced to Rs. 10 crore (from Rs. 15 crore).
The ceiling on the average amount a company could raise through CPs was increased from 20% to 30% of its working capital limit.
The denomination of CPs was reduced to multiples of Rs. 5 lakh (from Rs. 10 lakh), with a minimum issue size of Rs. 25 lakh per investor (down from Rs. 50 lakh).
Effective May 2, 1992, further relaxations were introduced in CP guidelines.
The working capital limit was further reduced to Rs. 5 crore (from Rs. 10 crore).
The minimum credit rating was relaxed from P1 and A1 to P2 and A2 as per CRISIL and IICRA guidelines.
On April 15, 1997, the minimum maturity for CPs was reduced from 3 months to 30 days, improving flexibility in short-term corporate financing.
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