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All You Need To Know About Commercial Paper

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All You Need To Know About Commercial Paper
Rajat Mishra - 07 June 2019

You might have heard of commercial papers in the news very frequently, leaving you wondering about these papers actually are. So, no worries we will explain you about commercial papers in all you need to know about it.

What are Commercial Papers?

According to RBI’s website, Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note which was introduced in 1990 in India. The objective behind introducing them ---help enable highly rated corporate borrowers with good credit ratings diversify their source of short-term borrowing using commercial papers. It is typically used by large banks and corporations to meet their short-term financial obligation like funding a new project.

What is the maturity period for commercial papers and of what denomination can they be issued?

Commercial papers have a minimum maturity of 7 days and a maximum of up to 1 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. They can be issued in denominations of Rs 5 lakh or multiples thereof.

Who can invest in CPs?

Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) can invest in commercial papers. However, investment by FIIs would be within the limits set for them by Securities Exchange Board of India, SEBI from time-to-time.

Is there any rating requirement for issuance? And if so, what is the rating requirement?

Yes, all eligible participants require a good credit rating for the issuance of commercial papers from Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose. The minimum credit rating shall be A-2 [As per rating symbol and definition prescribed by Securities and Exchange Board of India (SEBI)]. The issuers shall ensure at the time of issuance that the rating so obtained is current and has not fallen due for review.

For example ICRA’s short-term rating scale has these indicators A1, A2, A3, A4, D. Instruments with A1 rating are considered to have very strong degree of safety regarding timely payment of financial obligations. Instruments with A2 rating are considered to have strong degree of safety regarding timely payment of financial obligations. Such instruments carry low credit risk. Instruments with A3 rating are considered to have moderate degree of safety regarding timely payment of financial obligations. Such instruments carries higher credit risks as compared to instruments rated in two higher categories. Instruments with A4 rating are considered to have minimal degree of safety regarding timely payment of financial obligation. Such instruments carry very high credit risks and are susceptible to default. And Instrument with rating D are default are expected to default on maturity

So, now you must have got an idea about commercial papers and how does it work and who can invest in it. So now give a second thought before you plan to invest for commercial papers and always have a look at ratings of various corporations and other institutions you are planning to invest in.

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