Monday, 14 October, 2019

Commercial  Paper – Definition and Types


Money market instruments are securities that provide government, banks and businesses with a large quantity of capital for a short period. Several money market instruments in India offer short term lending to businesses. Some examples of money marketing instruments are commercial paper, treasury bills etc.

Commercial Paper Definition

Let us know what is commercial paper in the following lines.

Commercial Paper (CP) is a debt instrument which is issued by companies for raising funds for a small period (maximum up to one year). It is a type of unsecured money market instrument that is issued in the form of a promissory note.

Commercial Paper was introduced in India during the early ’90s. It is only transferable between All-India Financial Institutions (FIs) and the Primary Dealers (PDs).

Individuals can invest in Commercial Papers, banking companies, other corporate bodies (which are registered or incorporated in India) and unincorporated bodies, Foreign Institutional Investors (FIIs) and Non-Resident Indians (NRIs) etc.

However, investment by FIIs must be within the limits as set by the Securities and Exchange Board of India (SEBI).

Commercial Papers (CP) can be issued in the denominations of 5 lakh, and multiples thereof and they have a minimum maturity date of 7 days and maximum up to 1 year.

This instrument is not backed by any collateral. For that reason, only those companies which have a good credit rating can issue commercial instruments at a price that is reasonable in the market.

Types of Commercial Paper

Commercial papers are of four types:

  1. Draft: It is a written instruction by a person to another to pay a specified amount to a third party. There are three parties to a draft, and they are a drawer, drawee and payee.
  2. Cheque: It is an updated form of the draft with the drawee being a bank.
  3. Note: It is a promise which is made by one person to pay another a certain sum of money. There are two parties to a promissory note: one is drawer or maker and the other one is called a drawee or payee.
  4. Certificate of deposit: A special type of promissory note that is issued by the bank to the depositor.

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