Commercial Paper

With the introduction of liberalisation in the global market during the year 1985 to 1990, the Indian government introduced several short term debt instruments. One such debt tool is the commercial paper that came in the Indian money market in 1990 and initiated financial reform in India. 

Commercial Paper – In Simple Terms 

To put simply, it is a short-term debt instrument availed by companies when they need immediate funds to meet their short-term liabilities. These liabilities can be anything from stocking up inventories to financing payroll or others. 

According to the Commercial paper definition, this unsecured promissory note comes along with a set maturity and is issued by All India Financial Institutions (FIs) and Primary Dealers (PDs). In India, this period is between 15 days to 364 days. 

To understand the concept of CP easily, consider this example. A firm named ABC requires funds to stock up inventory for the upcoming sale season. To do so, they have a deficit of $20 Million. In such a case, they can buy commercial paper from the issuers for a face value of say $20.1 Million (depending upon prevailing interest rate) and receive $20 Million cash. So, the ABC Company pays an interest amount of $0.1 Million for the deal.

FAQ (Frequently Asked Questions)

1. What is Commercial Paper?

It is a short-term debt instrument issued by the financial companies to various eligible companies which need immediate funds for their short-term liabilities. These are usually unsecured in nature and are used to collect funds from financial companies or the public.

2. Who Issues Commercial Paper?

Commercial paper is issued by banks and financial companies to keep a balance on their short-term receivables and obligations. In India, Primary Dealers (PD) and All-India Financial Institutions (FIs) primarily issue this paper.

3. How to Buy Commercial Paper in India?

Commercial papers are traded amongst large institutions with significant investment amounts. However, individuals can also buy these through a dealer or via the financial institution. But their organisation should have high earning capability, liquidity, and should be renowned.

4. What is the Commercial Paper Market?

Commercial paper is a component of the Indian money market wherein the large corporations having a deficit of liquid funds to meet the short-term obligations invest in a debt instrument. This helps them evade the financial crisis situation and ensure they have enough liquid funds or working capital to carry the business operation.

5. Who Buys Commercial Papers?

Large companies, as well as individuals, can buy these commercial papers. Individuals can buy these from a broker, but the amount for investment is significant.