Understanding Commercial Papers

Topics: Commercial paper, Bond, Bank Pages: 2 (453 words) Published: May 9, 2013
Commercial paper is an unsecured, privately placed, money market instrument issued in the form of a promissory note. Commercial paper can be issued by the following parties namely; corporate, primary dealers and the financial institutions that have been permitted to raise short term resources under the umbrella limit fixed by the central bank.

The following are the eligibility criteria: The minimum tangible net worth should be as per the prescribed limit as per the latest audited balance sheet; the company has been sanctioned working capital limit by the banks or financial institutions and the borrowal account of the company is classified as a standard asset.

Maturity: The commercial paper can be issued for maturities between a minimum of seven days and a maximum upto one year from the date of issue. The maturity date of the commercial paper should not go beyond the date upto which the credit rating of the issuer is valid.

Commercial papers can also be issued as a stand alone product. The aggregate amount of commercial paper 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 financial institutions will; however, have the flexibility to fix working capital limits duly taking into account the resource pattern of companies' financing including commercial papers.

The financial institutions can issue the commercial paper within the overall umbrella limits fixed by the central bank of the country; i.e. issue of commercial paper together with other instruments; viz., term money borrowings, term deposits, certificates of deposit and inter corporate deposits should not 100 percent of its net owned funds, as per the latest audited balance sheet.

The total amount of commercial paper proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription. The...
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