Commercial Paper: Do you know What is Commercial Paper and how it is used by the company to meet its financial needs? Let’s Check the meaning and use of Commercial Paper.
What is Commercial Paper?
A Commercial Paper is an unsecured money market instrument issued in the form of a promissory note. Commercial paper is an unsecured, short-term debt instrument issued by corporations.
The Reserve Bank of India introduced the commercial paper scheme in the year 1989 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, in addition to the Corporate, Primary Dealers and All India Financial Institutions have also been allowed to issue Commercial Papers.
Commercial papers are issued in denominations of 5 lakhs or multiples thereof and the interest rate is generally linked to the yield on the one-year government bond.
Who can Issue Commercial Paper?
Normally, Commercial Paper can be issued by the following entity.
- Banking Companies,
- Other Corporate Bodies registered or incorporated in India and unincorporated bodies,
- Non-Resident Indians (NRIs),
- Foreign Institutional Investors (FIIs)
All the eligible issuers of commercial paper are required to get a credit rating from the recognized Agency as specified by the Reserve Bank of India. below are some of the Credit Rating agencies from where users can get Credit Ratings.
- Credit Rating Information Services of India Ltd, (CRISIL),
- The Investment Information and Credit Rating Agency of India Ltd (ICRA),
- The Credit Analysis and Research Ltd (CARE),
- The FITCH Ratings India Pvt Ltd
What are the Types of Commercial Paper?
There are four types of commercial paper that can be used by the company for short-term finance.
- Promissory Notes
- Certificate of Deposit
Promissory Notes: It is a written promise to pay money. A person, who is the maker of a note, promises to pay the bearer. The payee may be any person who is in possession of the promissory note or maybe a specific person named in the note.
Drafts: It is a tri-party paper confirming payment. In this case, it is the drawer who issues the order to pay, while the drawee is the party who is ordered to pay.
Check: drawn on a bank. It is payable on demand either to a specified person or to the bearer.
Certificates of Deposit: it is an acknowledgment by the bank of the acquisition of a specified amount from the depositor for a specified period of time. The bank promises to return the amount with interest after maturity. In the case of CDs, the bank is the maker, as well as the drawee, while the depositor is the payee.
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