With a view to enable highly rated corporate borrowers to diversify their sources of short-term borrowing and also provide an additional instrument to investors, RBI introduced Commercial Papers as a money market instrument in the Indian financial market in 1990.
A Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.
Corporates and primary dealers (PDs), and the all-India financial institutions (FIs) that have been permitted to raise short-term resources by Reserve Bank of India are eligible to issue CP. A corporate would be eligible to issue CP provided:
(a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore;
(b) company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and
(c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.
All eligible issuers are required to obtain a credit rating for issuance of Commercial Paper from a credit rating agency as may be specified by the Reserve Bank of India from time to time. The minimum credit rating should be P-2 of CRISIL or such equivalent rating by other agencies.
CP can be issued for maturities between a minimum of 7 days and a maximum up to one year from the date of issue and can be issued in denominations of Rs.5 lakh or multiples thereof.
CP can be issued as a "stand alone" product. The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower. Banks and FIs will, however, have the flexibility to fix working capital limits, taking into account the resource pattern of companies' financing including CPs. An FI can issue CP within the overall umbrella limit fixed by the RBI i.e., issue of CP together with other instruments viz., term money borrowings, term deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.
CP may be 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). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India. Mutual Funds, Banks, Insurance companies etc are the dominant investors in the CP market. Secondary market trading takes place through the interbank broking market between institutional participants.
CPs are issued at a discount to face value, as may be determined mutually by the issuer & investor.