What it means to invest in a commercial paper

CPs can be issued in denominations of Rs 5 lakh or multiples thereof.

Commercial paper (CP) is a shortterm debt instrument issued by companies to raise funds for a time period of up to one year.
Many fixed income schemes of mutual funds hold CPs in their portfolios. Here’s an in-depth look.

What is a commercial paper?
Commercial paper (CP) is a short-term debt instrument issued by companies to raise funds for a time period of up to one year. Introduced in 1990, it is an unsecured money market instrument issued in the form of a promissory note.

Any corporate with a high rating can diversify their sources of short-term borrowings using CP. Investors get an additional instrument to park money. This instrument is typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations, such as funding for a new project.

What time frame and denomination can commercial paper be issued?
CPs can be issued in denominations of Rs 5 lakh or multiples thereof. They have a minimum maturity of 7 days and a maximum of up to one year from the date of issue. However, the maturity date of the instrument typically should not go beyond the date up to which the credit rating of the issuer is valid.

Does a company issuing a CP need a rating? What are the requirements?
Any company keen to raise funds through CP needs to obtain the credit rating. The agency could be Crisil, ICRA, CARE, Fitch or any other credit rating agency (CRA) that may be specified by the RBI. The minimum credit rating shall be A-2 as per Sebi guidelines. The issuers also need to ensure that at the time of issuance of the commercial paper the rating so obtained is current and has not fallen due for review.

Since such instruments are not backed by collateral, only firms with high credit ratings from a recognised rating agency will be able to sell their commercial paper at a reasonable price. CPs are usually sold at a discount from face value, and carry higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing company or institution would have to pay. Interest rates will tend to fluctuate with market conditions, but will be lower than banks’ rates.

Who can invest in commercial paper?
Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, non-resident Indians (NRIs) and foreign institutional investors (FIIs), etc can invest in CPs. However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (Sebi) from time to time.
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